Benefits of a Unified EITC Program
“You cannot help men permanently by doing for them what they could and should do for themselves.” It’s a mantra by American religious leader William Boetcker that has resonated with policy makers for centuries. The frustrations reflected in this idea point to real problems with the way federal support is administered. While we would be wrong to rid ourselves of welfare entirely, the current system disincentivizeses work and keeps families trapped in a cycle of poverty. One solution is a Unified EITC program which combines the theory of a universal basic income with progressive work incentives in the form of direct and unconditional cash payments.
Under the present system, it can be difficult for needy families to transition to a self-sustaining lifestyle for fear of losing their financial safety nets. Projects such as SNAP, TANF, and HUD’s Housing Assistance provide an opportunity for America’s most vulnerable citizens to meet their basic needs. However, these programs contain several roadblocks for families trying to move beyond the need for government assistance.
Graphic created by author.
U.S. welfare programs work in two different ways. Some, TANF for instance, give money directly to families in need while others provide “in-kind transfers.” In-kind assistance, in this case, is any kind of welfare support that is distributed in non-cash forms like food stamps or subsidized child-care. In Virginia, a family of four which relies entirely on these programs can qualify for up to $24,120 per year worth of assistance through a combination of cash assistance and in-kind benefits. If one parent gets a job making $15,000 per year, the family’s benefit level will drop to less than $20,000. While this is still an improvement, it can be dispiriting for struggling households to lose what amounts to a third of their earned income via decreased benefits.
The second parent faces even stronger barriers against entering the workforce for a number of reasons. Most pressingly, the family will have to pay for child care, dramatically diminishing the actual benefits of a second income. The cost of daycare in Virginia is among the highest in the country, reaching an average of $24,929 per year for an infant and a toddler. Even with a less expensive option such as in-home care, they will be paying upwards of $17,500 to care for their two children. Many social safety net programs have provisions which adjust for child care expenses and most states offer some form of subsidized daycare. Even so, the system does far too little to offset these costs effectively. For example, SNAP allows families to discount the amount they spend on daycare from their income report. Yet, looking at the above chart, it’s clear that the extra $7,309 in food stamps does not even come close to covering the difference. In fact, due to a combination of child care expenses and reduced benefits, the family’s equivalent income actually decreases significantly when the second parent gets a job.
In some cases, a friend or family member may be able to look after the children, leaving the second parent free to find employment. At this point, however, benefit drop-offs will increase, minimizing the real advantages of a second income. If the second parent is able to make a salary of $20,000, the family will lose a further $15,000 of its welfare benefits, ostensibly reducing the value of the second parent’s entire year of work to less than $5,000.
Traditionally, if one parent is going to work, it will be the mother who stays home to watch the children. Therefore, a system that penalizes two-income households also discourages women from working and perpetuates the systemic separation of genders.
The second major deficiency of the welfare state is its reliance on in-kind transfers such as food stamps and housing assistance, rather than cash. The driving theory behind in-kind welfare is that providing people with goods and services will result in more targeted and effective poverty relief than payments without conditions.
“Benefits should have strings attached to them. After all, if it’s our money recipients are getting, we the people should have a say in how it’s spent” remarks Donald Trump in his book Time to Get Tough, reflecting the anxieties of many U.S. policy makers that, if not strictly regulated, welfare dollars will be wasted in the hands of the poor. Most evidence however, directly contradicts these fears. A 2010 study in rural Mexico concluded that there was no difference in levels of food consumption between households receiving food packages and those receiving cash—yet, the food packaging program was 20 percent more expensive to run. The study also found that “households receiving cash transfers bought largely nutritious foods, such as fruits and vegetables.” The logical application of these findings would be to move away from in-kind welfare and towards direct cash assistance in order to increase the effectiveness and efficiency of the welfare system.
The United States even has its own precedent for a large scale cash assistance program. In the 1960s and 70s, a “negative income tax” experiment that supplied un-regulated payments to low income families based on their income was linked to better academic performance for children, higher levels of nutrition for families, and more favorable birth outcomes in struggling populations. The trials also found that caregivers were using their benefits to spend more time with their children, on average working 13 percent less after the payments started. This could be considered a shortcoming of the system, except for the possibility that students' increased grades and attendance in school was a direct result of parents’ ability to be more attentive to their children.
The experiment was carried out by the Office of Economic Opportunity, a former agency of the U.S. government, with the goal of determining how the labor supply would respond to a basic income guarantee. More generally, researchers wanted to adapt methods widely used in the field of natural sciences, such as control groups and simple random assignment, for use in the social science of economics in order to be as objective as possible in their findings. Even today, the field of economics rides a fine line between science and non-empirical sociology, as many theoretical models are based more on intuition and historical trends than rigorous experimental evidence. “The negative income tax (NIT) experiment set a standard in seeking reliable information, which should be the current practice,” writes Walter Williams, policy analyst for the OEO. However, despite strong, empirical evidence in its favor, the NIT program lost out to sweeping welfare reform under the Reagan administration and was never thoroughly revisited.
If our current strategy is really so ineffective, what can we do to fix it?
“I would simplify the whole system,” states Dr. Ed Olsen, Professor of Economics and Public Policy at U.Va. “I don’t think we need to have housing programs; I don’t think we need to have food assistance programs...We could have a Unified EITC program.” Dr. Olsen isn’t alone in this belief. A study by the American Economic Association determined that 60 percent of economists were in favor of bolstering the EITC effort.
The Earned Income Tax Credit program is a form of negative income tax designed to incentivize work by increasing benefits directly with dollars earned. It is the closest solution we have to federal cash assistance without strings attached.
Under the current EITC, families earning $0 get no benefits while families with a low income, usually less than $15,000 per year, receive roughly 40 extra cents for every dollar they normally earn. This figure will be higher or lower depending on the number of children in the home.
After a certain income level, benefits plateau until they are slowly waned away in the “phase out” stage. At this point, families would ideally be able to care for themselves, thus lifting them out of the cycle of poverty.
On the other hand, Dr. Olsen describes the unified program as the entire schedule of EITC raised up and extended. At zero earnings, families would receive a cash amount that is less than the sum of the amounts under all existing programs. Then, as a work incentive, the program would provide more than the current 40 cents for each additional dollar earned.
Criticism has been levied against the EITC initiative due to the shortness of its plateau and phase out periods. The limited assets of the current plan result in households being given too little support to become truly self-sufficient, and the high marginal tax rate undermines the project’s work incentives. Dissolving TANF, SNAP, and HUD’s Housing and using that money to expand EITC, as suggested by Dr. Olsen, could dramatically extend the program’s reach and cure its most glaring shortcomings by extending both the plateau and phase out periods into higher income ranges.
*Assumes all income comes from earnings. Amounts are for taxpayers filing a single or head-of-household tax return. For married couples filing a joint tax return, the credit begins to phase out at income $5,890 higher than shown.
Data Source: Urban-Brookings Tax Policy Center (2020), Internal Revenue Procedure 2019-44, Internal Revenue Service.
Graphic created by author.
Graphic created by author.
Other barriers within the current system include marriage penalties, as married couples have to file jointly to be eligible, a complicated application process and the fact that tax credits are provided as a lump sum only once per year. These issues could all be rectified with additional policy changes under a unified system. For instance, allowing additional benefits for families with more than three children would remove the disincentive for two parents of multiple children each to marry. Additionally, tax credits could easily be distributed in monthly or bi-weekly amounts, reducing the need for financially constrained households to budget the money themselves. This change would also account for those who need to adjust their welfare status midway through the year. Finally, complications in the EITC filing system arise because applicants have to determine their actual wealth through a combination of income, family size, and assets—the same parameters factored in by the IRS when determining income tax. Seeing as all U.S. citizens are required to file for income tax, some simple cooperation by the IRS should be sufficient to inform the entire Unified EITC initiative.
In keeping with the example set forth by the NIT experiment, we should seek to conduct trial programs when implementing any major policy changes and the Unified EITC is no exception. If Dr. Olsen’s proposal is truly capable of providing support to America’s suffering populations, it deserves to be represented by reliable data—data which could dissuade the fears surrounding direct welfare, putting agency into the hands of the people who need it most.