In October, 2017, the Washington Post published a very strange series of articles about the recipients of disability benefits in the United States. The entire series is worth reading for various reasons, but I want to direct your attention to one particular entry: After the check is gone.
The principal character in the article, Donna Jean Dempsey, collects aluminum cans and hunts for wild roots towards the end of each month when her disability and SNAP benefits run out. The article refers to this as “the underground American economy, where researchers know some people receiving disability benefits are forced to work illegally.”
This is flatly false, and it’s repugnant, but it’s not surprising. The problem is not a dumb Washington Post reporter. The problem is an economy-wide revulsion towards self-employment.
“To work illegally” is a nonsense phrase
In the United States, our laws rest uneasily alongside our intuitions. Most people, most of their lives, work for large employers who mostly run competent “human resources” departments that mostly follow the law.
That creates the enormously convenient presumption that whatever your employer is doing is probably legal. You won’t always be right, but periodic high-profile class action lawsuits serve as a kind of warning signal to large employers to stick close enough to the law not to be caught out and become the next sacrificial lamb.
Nonetheless, the fact is that it’s virtually impossible for a worker to violate employment law.
Instead, when people say a worker is “working illegally,” they typically have one or more of three totally distinct ideas in mind:
- The worker is engaged in an illegal activity. For example, many forms of drug trafficking are illegal, so if your job is to traffic drugs, you might be “working illegally” in the sense of receiving pay for illegal activities, but the laws you’re violating aren’t employment laws, they’re laws against drug trafficking.
- The worker is employed in violation of employment law. It is illegal to hire some categories of workers, like certain non-resident aliens and minors below a certain age for certain types of work. It’s illegal to pay less than the applicable minimum wage. It’s illegal not to report your employees’ income. But it is not illegal for minors to work; it’s not illegal to accept less than the minimum wage. These are crimes committed by employers, not by workers, and penalties are levied against employers for the benefit of the injured workers.
- Finally, there’s a third sense which seems to be what our intrepid Washington Post reporter had in mind: a worker might have reporting requirements about the sources of outside income they receive, for example if a benefit program has restrictions on the amount of work they can do while continuing to receive benefits. But even in this case, it is still not employment law that is being violated; the work is not illegal, rather it is being reported improperly.
There’s nothing that says these categories can’t overlap: a non-resident alien (whose immigration status prohibits them from working in the United States) might engage in drug trafficking (illegal activity) and fail to report their income to the IRS (reporting violation). But none of these are violations of employment law: they’re violations of immigration laws, drug trafficking laws, and tax laws, and knowing the difference between them is essential to thinking clearly about these issues.
Donna Jean Dempsey is not working illegally
Now let’s return to the unfortunate case of Donna Jean Dempsey and Mallory, West Virginia. First, let’s agree that there’s nothing “illegal” about any of the work taking place:
- Donna Jean collects cans in order to sell them to a local recycling company. The recycling company does not appear to be violating any labor laws, and indeed operates a lively Facebook page so doesn’t seem to be trying to operate “under the radar” in any way. It’s possible there are tax reporting violations, for example if the owner deliberately declines to issue 1099-MISC forms where they’re required, but nothing like that is alleged in the article.
- Donna Jean collects wild roots from the nearby mountains and sells them to the same recycling company. Again, you can imagine circumstances where this might be illegal, if she was collecting and selling bald eagle feathers for instance, but I don’t know of any reason why Appalachian ginseng, Solomon’s seal, or bloodroot would be protected by any state or federal laws, and sure enough, that’s not alleged anywhere in the article.
What is clearly true is that Dempsey is not properly reporting her aluminum-can-and-wild-root scavenging income.
14 easy steps to get right with the law
What would it take for Ms. Dempsey to bring herself into full compliance with the state? Here’s a quick guide:
- Apply for a West Virginia State Business Registration. This registration is required for “all purposeful revenue-generating activity engaged in or caused to be engaged in with the object of gain or economic benefit, either direct or indirect,” so Donna Jean clearly qualifies.
- Apply for an Employer Identification Number from the IRS. While not strictly required, this is going to make it easier for Donna Jean to file the state and federal taxes for her business.
- Open a Free File Fillable Forms accounts.
- Attach Schedules 1, 4, C, and SE to form 1040.
- Begin with Schedule C, and add up all her income on line 1. Fortunately, since she’s scavenging her inventory she doesn’t need to deduct the cost of goods sold on lines 4 and 42.
- In Part II of Schedule C, she’ll want to deduct any expenses she incurred for the business, for example the “pruners for digging roots” she purchased, as well as any mileage costs she incurred driving to and from the mountain and the recycling facility. That means completing Part IV, “Information on Your Vehicle.” She’ll want to be especially careful keeping records of these expenses since vehicle deductions are a common target of IRS audits. Maintaining a paper log of her vehicle miles traveled is likely sufficient, but she should consider buying an app that allows her to track her vehicle travel more precisely in case of an audit. After completing Schedule C, she’ll copy her net profit or loss over to Schedule 1, line 12, and Schedule SE, line 2.
- At that point, she’ll want to move over to Schedule SE and calculate her self-employment taxes. Thankfully she can probably use the “short” form of Schedule SE and use the Free File Fillable Forms “Do the Math” feature to calculate her self-employment tax, and then copy over her self-employment tax to Schedule 4, line 57, and half her self-employment tax to Schedule 1, line 27.
- She can then complete Schedule 1 by copying line 12 to line 22 and line 27 to line 36.
- Moving back over to Form 1040, she’ll copy the numbers from Schedule 1, line 22, to Form 1040, line 6, and Schedule 1, line 36, to Form 1040, line 7.
- Next, she’ll subtract Schedule 1, line 36, from Schedule 1, line 22, multiple that number by 0.2, and write the result down on Form 1040, line 9.
- Moving to Schedule 4, she’ll copy the amount from line 57 to line 64, then copy that number back to Form 1040, line 14.
- Now she’ll subtract Schedule SE, line 6 from line 3, open up the Form 1040 instructions and turn to page 53, find the row corresponding to that number, and copy the figure on that line back to Form 1040, line 17a.
- At this point she should be able to allow Free File Fillable Forms to complete the rest of the calculations, and print and mail or electronically submit her return.
- Then do the whole thing over again for West Virginia.
Means-testing is a tax on those least able to pay it
At this point, you may have gotten the mistaken impression that I’m being sarcastic. After all, no one reasonably expects a disabled person with lifelong cognitive difficulties to file state and federal taxes in order to report $500 in income from salvaged roots and cans.
But you’re wrong. It may be unreasonable, but expecting sick and disabled people to report trivial amounts of self-employment income is exactly what’s implied when a journalist drops in and reports uncritically that people are “working illegally.” The statement is precisely that in addition to any health challenges they face, in addition to the grueling manual labor they perform, they should also meticulously report their income in order to avoid accidentally “stealing” benefits they’re not entitled to.
If that sounds insane to you, it’s because it is. But it’s not an exaggeration to say that’s how our means-tested benefit system is designed to work.
Means-testing turns everyone into criminals and cops
There are two problems inextricably tied up in means-tested anti-poverty programs:
- program design is so arbitrary and absurd that people are encouraged to lie in order to game qualification requirements;
- program design is so arbitrary and absurd that non-beneficiaries rightly assume beneficiaries are gaming qualification requirements.
Gaming qualification requirements is easy. If your hours fluctuate week-to-week, nothing could be easier than applying for Medicaid or SNAP with a paystub from one of your “low” weeks, since benefit administration offices mechanically calculate your annual income from your weekly or biweekly paychecks. You’re “supposed” to submit updated paystubs if your income rises, but obviously no one does if it will reduce their monthly benefit or disqualify them from Medicaid. Poor people can’t afford to be that stupid.
But gaming qualification requirements is so easy that non-beneficiaries are also aware of how easy it is. And that’s how you end up with folks quoted saying things like:
“‘I think it’s a joke,’ his cousin, Nathan Vance, who applied for disability earlier this year, told him one night after seeing a man on disability sell Vance a bundle of roots for $12.50. ‘People I know of run the mountains all the time. . . . And yet they’re on SSI. Beating the system.'” (emphasis mine)
This creates the absurd situation wherein beneficiaries are being encouraged to game the system through terrible program design, while non-beneficiaries are encouraged to judge and ridicule beneficiaries for gaming the system!
And indeed, this is precisely the pattern you see in the real world.
Pay for universal benefits with progressive income taxes
There’s no secret program design, no special form with particularly well-designed fields, no worksheet with particularly cunning flowcharts, no particularly well-trained administrators that can solve this problem. Naming the problem is itself naming the solution: provide universal benefits to everyone, then pay for them with a straightforward progressive income tax.
No more phase-ins, no more phase-outs, no more checking in at the welfare office, no more continually reporting income to case officers. No more case officers at all. No more cheating, and no more accusing people of cheating.
I do not say that this is particularly likely to occur in the next 5, 10, or 15 years, or even in my lifetime. But it doesn’t ever have to happen at the federal level, or the state level: now that you know how our anti-poverty programs are broken, and how to fix them, you have the power to tell your friends to knock it the hell off when they accuse desperately poor people of “gaming” the system they’re forced to live with as it actually exists.