TUESDAY’S PRESIDENTIAL DEBATE confirmed that the Democratic Party’s center of gravity has fundamentally shifted. The contenders projected a willingness to abandon the long-held shibboleths of liberal economic policymaking, embracing measures like universal child care, free college, public health care, and debt cancellation. Even the most moderate candidate on stage, Minnesota Sen. Amy Klobuchar, said she was open to a wealth tax. All of them lamented the yawning gap between rich and poor in America. Yet most of the candidates’ plans to fight economic inequality rely on expanding an anti-poverty program that has come under increasing fire for not living up to its promises — and excluding the neediest Americans.
The earned income tax credit is the benevolent ghost of American tax policy. With little fanfare, the EITC redistributes tens of billions of dollars to low-income workers and their families, lifting more than 5 million people out of poverty each year. Because it reserves benefits for those who earn an income, the EITC is also widely credited with incentivizing millions of poor people, especially single parents, to get jobs.
With the exception of Andrew Yang, who supports a universal basic income of $1,000 per month for every citizen over the age of 18, all the Democratic candidates who qualified for the October debate have expressed support, publicly or in correspondence with The Intercept, for expanding the EITC. On Tuesday, California Sen. Kamala Harris touted her EITC expansion plan, which would give some working families as much as $6,000 per year. New Jersey Sen. Cory Booker alluded to his plan to cut child poverty in half by expanding both the EITC and the conceptually similar child tax credit. Julián Castro has his own ambitious EITC expansion plan.
These proposals are designed to reward and encourage low-wage work. You’re only eligible if you earn income, and you get a higher benefit for each hour worked, up to a certain ceiling. In other words, the EITC “phases in” and then “phases out” at higher incomes. In the minds of many policymakers, the EITC is superior to unconditional cash transfers like basic income for exactly this reason: The EITC draws people into the labor market.New research suggests that the EITC does not actually draw people into the labor market.
There’s one big problem: New research by Princeton University economist Henrik Kleven suggests that the EITC does not actually have this effect. Contradicting the consensus literature, Kleven finds that the EITC was not the main reason a large group of single mothers joined the workforce in the 1990s — a fact that is typically cited as proof of the policy’s efficacy.
This finding — as yet unconfirmed — has the potential to remake poverty policy as we know it. As it stands, the EITC excludes the poorest Americans by design. Nonworkers, meaning those who do not earn any income, make up around 75 percent of poor people in America. As Matt Bruenig of the People’s Policy Project has found, the overwhelming majority of nonworkers are either children, elderly, have disabilities, or in school. Kleven’s research, Bruenig said, undermines the only justification for excluding these people from the benefit.
“If EITC doesn’t even incentivize labor supply,” said Bruenig, “then basically we’re just giving a big middle finger to poor people.”
There is an easy fix for this problem. If Democrats want to continue using tax credits to redistribute income, they can keep their EITC policies intact and simply lop off the phase-in — including the requirement to have an income — and thereby, in effect, create a basic income for poor people. There’s a bill in Congress that does just that. Introduced in June by Rep. Rashida Tlaib, D-Mich., and co-sponsored by Rep. Alexandria Ocasio-Cortez, D-N.Y., and Rep. Ayanna Pressley, D-Mass., the Building Our Opportunities to Survive and Thrive, or BOOST, Act takes Harris’s plan and makes the full credit available to everyone, including those who earn no income from work. As Dylan Matthews explained at Vox, “Under Harris’s plan, if you earn $0, you get $0. Under Tlaib’s plan, if you earn $0, you get $3,000 per person. No exceptions.”
THE TAX CREDIT — which currently maxes out at $3,500 per year for married families with one child, and $6,500 for those with three or more — is an artifact of an earlier era when the welfare state was under attack. Tax credits became the preferred policy for redistributing wealth downward precisely because they do so discreetly. Instead of justifying a welfare expenditure, lawmakers got to boast about cutting taxes. Instead of a handout, the credits rewarded hard work.
“The EITC was supposedly the perfect income-support policy because it got the incentives right,” said Marshall Steinbaum, an assistant professor of economics at the University of Utah and former senior fellow at the Roosevelt Institute.
A series of studies, focused primarily on a large expansion of the EITC in 1993, found that the EITC worked as designed: When the tax credit was expanded, the labor force participation of poor mothers spiked. But Kleven’s paper, by controlling for the idiosyncratic economic factors of the 1990s, finds otherwise. A wave of single mothers did join the workforce, but they probably did so for other reasons — namely, because the economy was booming and many were kicked off cash benefits by then-President Bill Clinton’s welfare reform, the Personal Responsibility and Work Opportunity Reconciliation Act.
Arindrajit Dube, an economist at the University of Massachusetts Amherst, cautioned against “drawing strong policy conclusions” before the findings can be rigorously confirmed, but said that Kleven’s research seems to weaken the arguments against “basic income” or targeted tax credits for low-wage earners.
“If it turns out EITC is not very effective at [encouraging labor market participation], it strengthens the argument for providing a substantial credit to those who need it most (i.e. the poorest),” said Dube.
Bob Greenstein, founder and president of the Center on Budget and Policy Priorities, expressed doubts about Kleven’s analysis. “The idea that his study settles the issue is clearly not correct,” Greenstein told The Intercept. Moreover, Greenstein fears the political consequences of abandoning the phase-in. “If a unified Democratic government pushed through — over Republican opposition — [a bill] making the EITC available to people without earnings, I fear it would convert the EITC, in the conservative worldview, into some ‘bad welfare program.’ And the next time Republicans had power, they’d come after it with hammer and tongs.”
Greenstein instead advocates expanding the Supplemental Security Income program and liberalizing the child tax credit to reach the non-earning poor. (Supplemental Security Income augments the income of the elderly and disabled, while the child tax credit is a partially refundable tax credit that can now be claimed by families with over $2,500 in earnings.) “Having been in too many EITC battles over the years, I’m just scared politically,” Greenstein said. “It’s not primarily a policy objection, it’s about political strategy.”
“It’s a perverse way to do redistribution,” said Steinbaum. Liberal policymakers, Steinbaum said, continue to be captured by right-wing fantasies about the moral defects of poor people. Ronald Reagan stigmatized single mothers who depended on cash benefits as “welfare queens,” and conservative economists falsely claimed that welfare exacerbated the innate pathologies of the poor, breeding laziness and dependency.
“The ‘culture of poverty’ thesis was invented by enemies of the welfare state,” Steinbaum said. “There was never any empirical support for it.”
Indeed, a vast literature debunks the idea that simply giving money to poor people significantly disincentivizes work or generates “dependency.” Rather, in many cases, unconditional cash transfers have been found to be more effective at alleviating poverty than means-tested and in-kind welfare programs.
The EITC, by excluding non-earners, unnecessarily perpetuates an insidious division between the “deserving” and “undeserving” poor, explained Steinbaum.
“No one chooses to be poor,” Tlaib, the Michigan Democrat and lead sponsor of the bill that would eliminate the EITC’s phase-in, told The Intercept. “If someone comes to me and they’re in need, I’m not going to say, ‘Why aren’t you working?’ I’m going to say, ‘How can I help?’”
Instead of blaming the poor for their poverty, Tlaib encourages her colleagues to look in the mirror. “I think we need to take some responsibility for failing them,” she said. “We haven’t done enough to combat poverty in our country. We hardly even talk about the ‘p word.’ We only ever talk about the middle class.”
Tlaib was familiar with Kleven’s research, but, she said, it wasn’t the motivation for her bill, the BOOST Act. “We wanted something like the earned income tax credit on steroids,” Tlaib, whose district is the third-poorest in the country, said. “Too many of our residents are caretakers of their elderly parents, disabled veterans, students trying to better themselves, or seniors who aren’t working. I put my residents first, and this is what they asked for.”
FOR NOW, PROPOSALS like Tlaib’s have seen limited support from presidential candidates. Many have signed onto the American Family Act, which would make the child tax credit fully refundable — in effect, providing a modest child allowance to families under a certain income cap.
A campaign spokesperson for Sen. Bernie Sanders, I-Vt., said that the senator supports Tlaib’s bill. “As we’ve seen in the two decades since the EITC was popularized among both center-right and center-left thinking as the way to raise wages and help workers,” a Sanders aide told The Intercept, “the profit shares of major corporations have just grown higher and higher and wages have not budged at all.”
Though Sanders has signed on to various EITC expansion bills, his aide made clear that creating a “fundamental shift in how Americans engage with work” is more important to the Vermont senator. “We really want to be talking about putting workers at the table, having workers set their agenda, their wages, their schedules, their benefits,” the aide said. This week Sanders released a plan to increase the power of workers in corporate decision-making and stimulate cooperative ownership.“There should be no distinction when it comes to helping working poor and non-working poor.”
That, however, still leaves questions about where nonworkers fit into the socialist campaign’s syndicalist vision. In the past, Sanders has been criticized for an overly work-centric approach to addressing poverty and inequality. Sanders often says, “Nobody who works 40 hours a week in America should be living in poverty.” Critics of this might suggest that no one should be living in poverty. A more generous EITC could lift more full-time workers out of poverty, but it wouldn’t help very poor children, the elderly, or people with disabilities who don’t work. Pressed on this subject, the Sanders aide said, “There should be no distinction when it comes to helping working poor and non-working poor.”
“We’re designing a platform to eradicate poverty,” the aide said, perhaps alluding to policy proposals to come. “That’s the goal of Bernie’s platform.”
IT REMAINS TO be seen whether Democrats will finally recover from their Reaganite hangover and embrace universal policies that do not attempt to police the morality of the poor. Such policies may even have political benefits in the long run.
The same qualities which attracted Democrats to the EITC may also undermine its political efficacy. “This is the double-edged sword of the tax credit. The opacity is deliberate,” said Bruenig of the People’s Policy Project. “It convinces timid politicians they can get away with it. But, on the other hand, the opacity means they aren’t rewarded for it electorally.”
Part of what it will take to achieve social democracy in America, Bruenig suggests, is building a constituency that knows what social democracy feels like. Discreet redistributive policy won’t build a sturdy constituency for redistribution.
Tlaib’s bill is a step in that direction, and her constituents have taken notice. “It’s the most popular policy we’ve proposed,” Tlaib told me. “Residents yell at me ‘BOOST, Rashida!’ and I say, ‘Yes, you deserve it.’”
Reagan called the Earned Income Tax Credit part of the ‘best anti-poverty bill’ ever but it was never considered in the recent tax debate.
There are better solutions than wealth taxes, ‘Medicare for all’ or universal basic income.
American capitalism is at a serious inflection point. Many Americans, including the two of us, are alarmed by enormous levels of inequality and by declining economic mobility. We are concerned that in many cases American markets are no longer the most competitive in the world. And, we worry that our country’s long-term economic strength will slowly deteriorate because of an unsustainable fiscal trajectory that leaves future generations worse off.
The solution is not to upend the system. A market-based economy, for all its flaws, is still the best way to achieve broad economic prosperity and to ensure that living standards continue to rise over time. But the answer is not to maintain the status quo, either.
Radical change or complete inaction seem to be the only types of solutions that are being debated in today’s marketplace of ideas. Americans can’t afford to restrict our thinking based on political ideology and the false equivalency of having to pick one extreme or the other. That’s a recipe for stalemate.
Since founding the bipartisan Aspen Economic Strategy Group more than two years ago, our focus has been on bringing together leaders with different perspectives to highlight the importance of evidence-based policymaking. Earlier this week, 38 of our members signed on to a statement of principles that should guide the development of a new economic policy agenda. We also believe we must rigorously analyze some of the proposals that are being put forward in today’s policy debates, including universal basic income, “Medicare for all” and direct taxes on wealth.
Based on research from the newest book from the Aspen Economic Strategy Group, the two of us are more convinced than ever that those policies are fundamentally misguided and would result in economically harmful outcomes that could put our economy on an unstable and precarious path, harming the very people they are intended to help.
The collective work to identify specific policy solutions, however, also suggests to us that there are still many ways to ensure more that many more people can participate in America’s successes. And while there are no silver bullets, nor will there ever be complete agreement about every policy detail, we see many excellent ideas that are ripe for bipartisan collaboration and that can begin the process of adapting our economic policies so that they work for far more people.
First, we must aggressively invest in our human capital. That starts with addressing the supply side of the education market, including investments in community colleges to provide more students the option to obtain a high-quality education and complete their degree. This ensures that more American workers have the skills they need to compete in a global economy. Just as important, investing in education will increase economic productivity, which will help drive the wage growth needed to reduce income inequality.
There are other steps we can take to further address the distribution of economic opportunity and wage growth. But as Melissa Kearney and Magne Mogstad have argued, universal basic income is not a viable solution. It directs resources away from the neediest individuals and fails to address the underlying factors that contribute to inequality. Instead, we should look at more targeted and efficient approaches to encouraging work by supplementing the wages of low- and middle-income Americans, such as expanding the earned -income tax credit or enacting a wage -subsidy program.
Finally, we have to confront the uncomfortable truth that our country is on an unsustainable fiscal trajectory. Spending priorities such as education, infrastructure, and high-value research and development are underfunded, while our commitments to entitlements continue to rise indefinitely. Restoring the sanity of our fiscal position will require raising more revenue, slowing the rate of growth in health care spending, and making Social Security sustainably solvent.
Returning to fiscal responsibility through spending reform alone is neither just nor possible. The United States needs to reform its tax code in a manner that is more progressive and produces more revenue. But there are better approaches than a wealth tax, which would be highly distortionary and is unlikely to capture nearly as much revenue as its proponents claim. Making the income tax code more progressive and reforming estate and gift taxes to eliminate the loopholes that allow wealthy Americans to pass on wealth to their children at very low tax rates would be a better first step.
Whatever path policymakers choose, it is clear that we need to move away from theoretical arguments and wishful thinking and into the arena of pragmatic policy solutions that can actually be enacted. There is a plethora of policies that already enjoy broad bipartisan support, and these policies can be enacted only through effective government, which will require leaders to engage in principled compromise and make decisions grounded in facts and analyses.
The cost of inaction is severe and grows each day, as inequality undermines our economic strength and more Americans become disillusioned with the capitalist system that has made upward mobility a pillar of the country’s identity since its founding.
Robert Reich explains how expanding the Earned Income Tax Credit would boost wages for millions of working Americans.