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This Simple Tax Policy Change Could Boost The Cash, Credit, And Well-Being Of The Working Poor

Expanding the Earned Income Tax Credit is a rare policy for helping the poor that’s supported on both the left and the right–and could be a step toward a universal basic income.

This Simple Tax Policy Change Could Boost The Cash, Credit, And Well-Being Of The Working Poor
“Providing the money through the EITC gives people more of a sense of social inclusion because they’re getting a tax refund like other Americans.” [Image: liuzishan/iStock]

The Earned Income Tax Credit (EITC) is widely considered the federal government’s most effective anti-poverty program. Sending tax refund checks to millions of low-income Americans every year, it helps people keep more of what they earn, and helps people stay working (and not claiming other benefits). In the 2015 tax year, more than 26 million families and individuals received the EITC, with an average payout of about $3,000 (the maximum amount available is about $5,500). Unusually, the EITC also has broad bipartisan support. Everyone from Paul Ryan to Barack Obama to Ro Khanna, a liberal Democrat congressman from Northern California, has argued for expanding the program both in the amount of credit-dollars available and in the number of people who can claim it. Being an effective tax cut, it gets endorsement from Republicans, who love tax cuts; being anti-poverty, it gets support from Democrats, who tend to want to help the nation’s poorest.

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“The [EITC] has proven to be a very effective anti-poverty program for families with children.” [Image: liuzishan/iStock]
Some advocates say it could even be the basis for, or an alternative to, a basic income. Indeed, the EITC is like a basic income in that it gives people more to spend on basic goods and services. But, of course, it’s conditioned on people working to get the credit. A basic income isn’t necessarily conditioned on its recipients doing anything at all.

Republicans and Democrats, including Ryan and Barack Obama, have both called for expanding the EITC to include young people without kids–a group that’s largely excluded at the moment. Workers under the age of 25 aren’t covered at all, even when they have kids. And that’s the focus of a large ongoing trial in New York City led by the Mayor’s Office for Economic Opportunity and involving several large philanthropies, including the Kresge Foundation, Laura and John Arnold Foundation, and the Robin Hood Foundation. It tests the effects of increased EITC payments to childless workers earning up to $30,000 per year, including their levels of after-credit incomes, their participation in the workforce and their well-being.

At the moment, the tax system does few favors to people on the lowest incomes. According to the Center on Budget and Policy Priorities, a 21-year-old man on poverty-level wages ($12,500 a year) must pay $956 in payroll taxes, plus $214 in federal income taxes. That leaves him $1,170 below the poverty line. He is not currently eligible for the EITC.

The experiment could provide strong evidence for the benefits of expanding EITC to groups that are currently under-covered or not covered at all.

A 30-year-old woman earning the same money pays the same taxes but is covered under the EITC program (because she is over 25). But, if she’s childless, she receives just $184 in credit–meaning she too is effectively “taxed into poverty.” Currently, $506 is the maximum EITC available for workers without dependent children, and that’s only on offer until they reach a threshold of about $15,000 in annual earnings.

The experiment shows what might happen if the federal EITC was extended to childless recipients. Starting in the 2015 tax year, the trial, called Paycheck Plus, randomly selected 6,000 recipients, half of whom receive extra money, and half of whom act as a control. The pilot makes annual payments, running over three years, reaching as much as $2,000, or about four times the maximum EITC credit currently available to childless workers.

MDRC, a nonprofit social policy research firm, recently announced the results from the first two years in New York, and it says the impact was largely positive. After-bonus incomes went up (that is, above the amount people get in EITC) and work rates increased by 3.5% in the first year (compared to a control group). Moreover, there’s no evidence the program was a disincentive to work. That’s despite the oft-repeated idea that giving people government money naturally leads them to be lazy.

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Some see an expanded EITC as achieving some of the goals of a universal basic income, but without the political headaches of drastically remaking the federal government to help pay for it. [Image: liuzishan/iStock]
“The [EITC] has proven to be a very effective anti-poverty program for families with children,” says Cynthia Miller, an economist at MDRC who helped evaluate the first stage of the experiment, in an interview. “Given these interim findings that it increases income and employment rates, and that it doesn’t lead to any work reductions that some people are concerned about, I think it’s very encouraging.”

MDRC still needs to evaluate the third year of New York payments from the current tax year. Plus there’s a whole separate, identical trial taking place in Atlanta. So we won’t have full results until 2020. But if the results from the initial phase are replicated in the other years, the experiment could provide strong evidence for the benefits of expanding EITC to groups that are currently under-covered or not covered at all.

“Providing the money through the EITC gives people more of a sense of social inclusion because they’re getting a tax refund like other Americans. It’s not considered welfare, so that’s a positive,” Miller adds.

Ro Khanna’s proposed EITC expansion, which he created with U.S. Senator Sherrod Brown is a good deal more ambitious. The Grow American Incomes Now Act (GAIN) would increase the credit available to childless workers to $3,000 and increase the EITC for families with two kids to around $10,800. Khanna told Vox’s Greg Ferenstein that an expanded EITC could help make up for the loss of real wages among the lowest-earning Americans, shelter insecure workers in the gig economy, and help manage the shift to a more automated future where fewer jobs are available. Indeed, some see an expanded EITC as achieving some of the goals of a universal basic income, but without the political headaches of drastically remaking the federal government to help pay for it.

“This seems more politically feasible [than UBI] seeing that it’s conditioned on work,” says Miller. “But it’s not going to help people who can’t work, so it can’t be the only thing. We also have to support people who can’t work.”

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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