Making Earned Income Credits a Better Incentive for Work and Fair to the Childless

Citizen Wealth Financial Justice

Energy-Tax-CreditsPeterborough    In a recent op-ed in the Wall Street Journal, Princeton economist, author, and former Vice Chairman of the Federal Reserve Alan Blinder made a brilliant case for Congress to actually read Obama’s proposal and do more to make the Earned Income Tax Credit really increase citizen wealth and even, are you listening my Republican buddies, act as an incentive for lower income workers to in fact work more.  It’s worth reviewing his arguments and sharing them widely.

            First, he simply pointed out how the program works now in three stages:  phase-in, plateau, and phase-out. 

In the phase-in stage, as Jane’s annual earnings rise from zero to $9,720, the EITC reduces her tax bill by 34 cents for each additional dollar she earns. Thus, if her employer pays $10 an hour, Jane nets $13.40 for each additional hour worked—providing a financial incentive to work more. The credit stops increasing at $3,305 a year—which happens when her earnings reach $9,720 a year—and then remains on this plateau until her earnings reach $23,260 (less if Jane is single). The credit then begins to phase out—at 16 cents for every $1 earned. The tax credit would be entirely gone when Jane’s earnings reach $43,941 a year. Notice that the EITC actually creates a disincentive to work more in the phase-out range by raising Jane’s effective tax rate.  But the EITC is vastly less generous if Jane has no children—as it has been throughout the credit’s history. If Jane is childless, her subsidy rate during the phase-in would be just 7.65% rather than 34%. The benefit would plateau at $496 a year rather than $3,305, and the phase-out would begin when she makes $13,540 rather than $23,260. These are huge differences.

            Secondly, he basically argues that President Obama’s proposal is too moderate, because it does not equalize the EITC benefit between childless workers and workers with children, but he advocates the proposal, despite its modesty, as still doubling the maximum benefit for childless workers, and therefore also doubling the work incentive. 

            Why a program initiated by Republican President Gerald Ford, heralded by Republican President Ronald Reagan as the “best antipoverty…measure to come out of Congress,” and extended by both President’s Clinton and Obama, is nickeling and diming between workers with and without children makes no sense to me at all.  Work is work and workers and workers, so systemic discrimination just seems counterproductive and mean spirited, but maybe that’s just me.

            It especially seems callous to not at least do what the President is proposing because Blinder points out that the cost is only $6 billion to make this happen, which is hardly a rounding error in the federal budget these days, and is easily offset by closing even minor tax loopholes that Congress is so generously providing to the rich on a daily basis.

            If our political ideology worships the dignity of work, then why can’t Congress put our money where its mouth is?

*** song of the day

Please enjoy Robert Cray’s You Move Me