A Bipartisan Plan to Combat Poverty
In the weeks since his inauguration, U.S. President Donald Trump has shown little appetite for anything else besides tweeting. This apparent lack of interest in any actual governance means much of actual policy making will fall to Congress. However, they seem to have forgotten how to govern after not having a unified government in over ten years.
After the fiasco that was the rollout of the American Health Care Act (AHCA) and Trump’s skinny budget, it is apparent that Republicans will occasionally need Democratic support to pass legislation. If Republicans are serious about regaining credibility as more than an obstructionist party and Democrats want to be more than simply the Tea Party 2.0, then the parties’ respective leaders must find areas that are conducive to bipartisanship. One of those areas could be the Earned Income Tax Credit.
Like Social Security, the earned income tax credit (EITC) is another program that has attracted bipartisan support since it was enacted. The EITC is a tax credit that is available to both low-income singles and couples, with and without children. It is also refundable, meaning that eligible filers can receive the money back from the credit even if they have no tax liability. For the poorest in society, EITC refunds can represent double-digit percentages of annual income. These benefits in and of themselves attract bipartisan support. The right likes it because it is seen as a tax break; the left likes it because it is an effective poverty fighting measure. But there is an additional benefit that strengthen this support: an incentive to work.
The EITC has benefit levels that are divided into three brackets that are determined by the recipients’ adjusted gross income. The first is the “phase-in.” For each dollar that an eligible worker earns, the benefit level increases. Once the worker reaches the maximum value of the benefit, it stays stable until workers start to earn too much to earn the credit. In this final bracket, the benefit level is lowered for each dollar earned until the benefit is finally zero. This facet of the EITC appeals to both sides once again: The left sees billions of dollars of aid going to low-income households. The right sees a policy that encourages work rather than dependence.
On top of the clear benefits of increased income, there have been a range of other, indirect benefits that have come to be associated with the EITC. These other benefits large affect children in EITC eligible households. They include increased infant and maternal health, better school performance, increased enrollment in higher education, higher incomes later in life, and increased Social Security benefits among women.
Research has found that women who were eligible for the EITC expansion in the 1990s experienced “reduced mental stress, compared to similar women who would not have been eligible for the expansion.” Furthermore, researchers at UC Davis found that the EITC was associated both with a decrease in rates of low birth weight and an increase in the average birth weight, a measure that is “an effective predictor of adult health as well as economic outcomes.” Although the EITC is not primarily concerned with health, those outcomes place it on par with health programs such as the Supplemental Nutrition Assistance Program (SNAP) and Women, Infants, and Children (WIC).
Recent studies have also linked the EITC to better educational outcomes among children in EITC eligible households. These outcomes include increased test scores, particularly in math, among elementary and middle school aged students. The same research also found an increased probability of earning a high school diploma or GED by age nineteen, and the probability of completing at least year of college by age nineteen by 2.1 percentage points and 1.4 percentage points, respectively. This latest study joins the large body of research that has already shown increases in K-12 education performance and test scores.
A final indirect benefit of EITC benefits is increased income among adults whose families received the benefits as children: “For children in low-income families, an extra $3,000 in annual family income between their prenatal year and fifth birthday is associated with an average 17 percent increase in annual earnings and an additional 135 hours of work when they become adults.” Researchers hypothesize that this correlation is due to better health as children. By avoiding poverty-induced childhood diseases, they are able to avoid these diseases carrying into adulthood and therefore able to have healthier lives overall. On top of that, most of those that benefit from the EITC are working-age single mothers. As a result of the EITC serving as a work incentive and these women working, and earning, more, they receive increased Social Security benefits at retirement.
There are three possible improvements that are commonly cited to improve the EITC: creating multiple tax refund days, expanding eligibility, and implementing state level EITC programs in addition to the federal one.
Ninety-five percent of EITC recipients have an average of $2,000 in debt. The majority of this debt comes from credit cards, with other types including utility, car, and student loans. This debt was largely because income only covered an average of two-thirds of their monthly expenses, with the last third coming from the EITC. Although receiving the EITC benefit should in theory help families pay off their debt, it does not. These families continue to accumulate debt because they use the windfall of the EITC at tax time to buy things that are “normally confined to middle-class families, such as a special birthday present for a child or dinner out at a restaurant.” Despite this, most families report that they prefer receiving the one-time payment instead of hypothetical periodic payments throughout the year, which would help pay down debt.
However, in a pilot program in Chicago, 229 EITC recipients were enrolled in a program where they received their benefits in four installments throughout the year. At the end of this program, 90% of participants reported that they preferred the installments rather than a single payment. Furthermore, they were able to save more of their refund both relative to the control group and to themselves in the past year when they received a one-time payment. Multiple payments over the course of the year helps to improve financial stability and would require minimal administrative changes to implement. This is even more feasible, given the strong bipartisan support that the EITC already enjoys.
One of the criticisms that surrounds the EITC is the low levels of benefits that it pays out to childless adults relative to what it pays families. Although families tend to have more expenses, childless adults can still have as much, if not more, debt. In a plan endorsed by both former President Obama and Speaker of the House Paul Ryan, the benefit for childless recipients would be raised from $506 to over $1,000 annually, while also lowering the minimum age to receive the credit from 25 to 21. The White House has stated that this plan would benefit 13.2 million Americans. On the other side of the aisle, the conservative American Action Forum estimates that the plan would increase employment by 8.3 million jobs and bring the labor participation rate to pre-recession levels.
State EITC programs also improve the federal program. Twenty-six states and the District of Columbia have a state EITC program that mirrors the requirements of the federal program and provides a percentage of the benefit that recipients already receive from the federal government, ranging from 3.5% in Louisiana to 85% in California. Twenty-three of these states have a refundable credit, which makes them especially effective. There are more complications for running the EITC at the state level, as they cannot run deficits like the federal government can. However, given the effectiveness and support of the EITC, states should make every effort that they can in order to enact and expand their own programs to supplement the federal one.
Making policy is difficult. Making effective, well-thought-out policy even is more so. Fortunately, the EITC is already effective, well-thought-out, and largely implemented. These are simply tweaks, and given the policy’s broad support, should not be that hard to enact.
The views presented in this piece do not reflect the views of other Arbitror contributors or of Arbitror as a whole.
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