Finding an Opportune Way to Expand the Earned Income Tax Credit
President Obama announced only one major new proposal during his State of the Union address. Here's what he said:
I agree with Republicans like Senator Rubio that it [the EITC] doesn't do enough for single workers who don't have kids. So let's work together to strengthen the credit, reward work, and help more Americans get ahead.
Having worked on the EITC and other wage subsidies for a long time (and having introduced them at a crucial stage of tax reform efforts in the 1980s), I say it's about time they were back on the table. Particularly since the onset of the Great Recession, policy discussions around helping those with lower incomes have focused on unemployment insurance, food stamps, and government-subsidized health insurance. Employment needs to move toward the front of our public policy agenda.
As necessary as these other social safety net programs might be -- and am not trying to assess their merit here -- they generally do not encourage people to stay in the workforce. Like the welfare of old, before the onset of reform of what then was Aid to Families with Dependent Children (AFDC), they provide the greatest benefit to those who do not work at all. While it's debatable whether a simple EITC expansion increases total labor supply, there is almost no doubt that per dollar of cost it increases employment more than many other social welfare provisions.
Employment has been a vexing and growing challenge for the American economy. The share of all adults who work -- also called the employment rate -- was declining even before the Great Recession, particularly among the young and the near-elderly. Indeed, a declining employment rate represents a far bigger and longer-term issue than unemployment, since the NON-employment rate includes both those who are unemployed and those who drop out of or never join the labor force.
Concern over employment makes wage subsidies fertile ground for bipartisan consensus, if -- and this is a big “if” in these partisan times -- both sides can claim victory from the deal.
Consider the history the EITC. Almost every president since Richard Nixon has signed legislation establishing the EITC, expanding it, or making some provisions permanent. And it's been bipartisan. The initial enactment and the largest increases all occurred under Republicans -- Ford, Reagan, and George H.W. Bush, while the expansion during the Democratic Clinton administration was also quite significant.
Many who backed these legislative changes did not view the credit in isolation. They often favored it over some alternative -- welfare for Senator Russell Long (the EITC's first champion) and a minimum wage increase for President George H.W. Bush. Or they accepted the EITC as part of a broader tax or budget package. The EITC was never the subject of stand-alone legislative action.
That leads us to today, and what compromises might be supported by both political parties. I suggest two possibilities.
One, following our historical pattern, is to expand the EITC as an alternative to other efforts. At some point, recession-led unemployment insurance expansions will end. A bill to increase the minimum wage might go nowhere. Might an expanded wage subsidy be a compromise? A broader tax or budget bill always presents possibilities. The EITC offers one way to mitigate the net impact on lower-income populations, whether offsetting losses from new deficit reduction efforts, or ongoing cutbacks due to sequestration or dwindling appropriations.
The other is to tweak the EITC so it interacts better with other policy goals, such as reductions in marriage penalties -- a cause often advocated by Republicans. The childless single workers identified by the president are not the only ones left out of any significant wage support. So also are many low-income married workers. Despite recent changes, the EITC still creates marriage penalties, particularly if a low-wage worker marries into a household already receiving the maximum credit. Such a low-wage worker often fares worse than a single person who gets nothing or almost nothing: once added to the household, the additional worker's income can phase out his partner's EITC benefits and reduce or eliminate any previous eligibility for other public benefits. Current government policy announces that it is more advantageous to stay unmarried.
Simply expand the current, very small, credit for childless single people, and marriage penalties would multiply in spades. I suggest including in any expansion low-wage workers who decide to marry or stay married, not only those single persons left out. Such an expansion would proceed largely along the same lines as the president's, but also reduce marriage penalties.
In sum, the president's best path to bipartisan support for the EITC is to stress more policies that favor employment, offer the expansion as a compromise from other efforts less favored by his opposition, and reduce marriage penalties.
Gene Steuerle is the Richard B. Fisher chair and an Institute Fellow at the Urban Institute. This piece originally appeared on his blog, The Government We Deserve.