The Oddities of the EITC and Why We Should Think Twice About Its Further Expansion

Congressman Ro Khanna has adopted the idea of expanding the size of the Earned Income Tax Credit recently and attracted some media attention as a result (Lowrey at Atlantic; Ferenstein at Quartz and at Medium). The idea comes from a Neil Irwin piece at the New York Times, which the CBPP and Tax Policy Center helped prepare the background figures for.

The precise content of Khanna’s proposal is, according to Ferenstein, still forming. But in general the point is to increase EITC benefit levels substantially in order to counteract the effects of decades of wage stagnation.

Since his election last year, Khanna has quickly established himself as one of the most ambitious and progressive members of Congress. His interest in substantially expanding the EITC is clearly part of a genuine desire to do something big to fix our country’s festering inequality problem. But there are good reasons to believe that an expanded EITC is not the best approach.

The EITC gets a lot of unqualified praise because it helps to increase the disposable incomes of many low-earning families. Perhaps because it has these positive benefits, little attention is paid to the problems and downright strangeness of the program. But if we are going to start considering making it an even bigger part of the US welfare state, we really should consider these defects, both with the EITC in general and Khanna’s EITC.

  1. High improper payment rates. The IRS estimates that more than 1 in 5 EITC payments are improper. If this is going to be the centerpiece of a new distributive agenda, we probably should figure out how to actually administer it correctly.
  2. Employers capture some of the benefit. It is impossible to say how much, but an oft-cited Jesse Rothstein model concludes that employers could capture as much as 27 percent of the EITC benefits through reduced wages.
  3. Pegging child benefits to earnings is absurd. The truly bizarre thing about the EITC is that it combines a wage subsidy with earnings-related child benefits. The reason this is weird is that it does not make sense to say that parents who earn more money should get more benefits for their children. A child of a $5,000-earner is no less needy than a child of a $10,000-earner. In fact, it’s the opposite. Yet the EITC gives far more child benefits to the richer child than the poorer child. Any major EITC reform we embark upon should go ahead and sever the child benefit element from the EITC and move it into its own program (see here). Then, the EITC could act as a pure wage subsidy that pays the same benefits to all adults with the same earnings.
  4. The EITC is not a basic income or negative income tax. Khanna has mentioned in various interviews that his plan is a kind of basic income proposal, but it is not. Any plan where the benefits phase in based on earnings cannot be a basic income program or a negative income tax. This is because a phase-in design deprives those with lower earnings (or no earnings) of the full benefit. Additionally, it’s worth noting that the phase-in design is what allows employers to capture some of the benefit through reduced wages. A true negative income tax, which lacks a phase-in, has the opposite effect in that it should actually increase the wages employers pay people (see again Rothstein).
  5. It does not really address wage stagnation. This may or may not be an issue depending on how important you think wages are, but it is worth pointing out that this proposal does not increase people’s wages to bring them up to where they would be without stagnation. In fact, since the employer captures some of the benefit through reduced wages, the proposal actually does the opposite: it pushes wages down some. More generally, this is a transfer income strategy, not a labor income strategy. That distinction may be normatively meaningless and transfers may be the best we can do in a poorly organized labor market with very little coordinated wage-setting, but it is nonetheless worth noting that an EITC expansion does not directly fix the wage inequality problem that motivates its proponents.
  6. The $1 trillion price tag for an expanded EITC is really not that much. This is more a criticism of the coverage of the idea than the idea itself. Irwin describes it as “serious money” and Lowrey as “a lot of dollars.” But in reality, $1 trillion means $100 billion per year. Against a $19 trillion GDP, that’s a touch over 0.5% of GDP. Talking about sums like this as if they are astronomical is both misleading and unhelpful. The US has plenty of room in its tax level for an extra 0.5% of GDP.
  7. These and other problems are good reasons to think twice about making a substantial EITC expansion the next big thing in US welfare development.There is clearly some room for an earnings-related wage subsidy type program, but it probably should not be the centerpiece of an expansion agenda.

    Things like free child care, free health care, universal child allowances, and other similar benefits could achieve the same or similar net distributive result (provided you do the right stuff on the tax side) and are far better ways to expand the welfare state than trying to use it to (somewhat counterproductively) patch up our labor market’s wage-setting problems.

James Baldwin on the Immiseration of Inequality

If you talk about inequality and poverty in the US for long enough, conservatives and even liberals of a certain recent vintage will invariably raise the point that bottom incomes in the US are higher than many incomes elsewhere in the world. Sure, they say, it may not be that those on the bottom of our society are treated totally fairly, but we must put it in perspective before we go about harshly indicting the political economic system.

Whenever I see this I am always reminded of the famous James Baldwin v. William F. Buckley debate, which took place in Cambridge in 1965. Prior to Baldwin speaking, a Cambridge student made exactly this point to Baldwin, but about Blacks in America.

I do not want to say the Negro in America is treated fairly. But at the same time, the average per-capita income of Negroes in America is exactly the same as the average per-capita income of people in Great Britain. […] There are only five countries in the world where the income is higher than that of the American Negro and they do not include countries like West Germany and France and Japan. There are in America 35 Negro millionaires. […] I do not, by saying this, wish to emphasize that the Negro is fairly treated. I merely wish to try and convey a more realistic and objective account of the situation of the Negro.

Of course, looking back, most probably cringe at this argument. Indeed, you can tell from the video that most found the argument preposterous even then. After all, we are talking about an America that was just one year past the passage of The Civil Rights Act of 1964, an America that was only barely coming out of official apartheid.

Baldwin does not respond to the point directly in his speech, but he does a good job explaining how unsatisfying this objection is.

The most serious effect of the mill you’ve been through is, again, not the catalogue of disaster: the policeman, the tax drivers, the waiters, the landlady, the landlord, the banks, the insurance companies, the millions of details 24 hours of every day which spell out to you that you are a worthless human being. It is not that. It is that by that time you’ve begun to see it happening in your daughter or your son or your niece or your nephew, you are 30 by now and nothing you have done has helped you escape the trap. But what is worse than that is that nothing you have done and, as far as you can tell, nothing you can do will save your son or your daughter from meeting the same disaster and possibly coming to the same end.

Immense inequality is experienced by those on the bottom end of it as a parade of humiliations and feelings of worthlessness. It is an index of domination in society. That income levels in other societies might be lower still does nothing to mitigate that suffering. And when combined with an understanding of the likely permanence of that situation for your descendants, there is an experience of hopelessness that is devastating.

Take Other Kids to Work Day Highlights the Absurdity of Social Mobility

Richard Reeves of Brookings has a piece in Quartz where he argues that, for social mobility sake, people should not take their own kid to work. Instead, Reeves explains, they should take a kid from a different social class.

This week, parents are being urged to take their kids to work for the day. But here’s a better idea: Don’t. Strike a blow for equality by taking a kid from a different social background instead.

Take Our Daughters and Sons to Work Day is intended to get children thinking about their future careers, but by having parents take their own kids to work, we perpetuate class divides. If your mother is a lawyer, you spend the day in a law firm. If your dad stocks shelves in a grocery store, then—if he is even allowed to bring you along—that’s what you will see. If your parents are unemployed, you don’t have a chance to go anywhere at all. And so the wheel turns.

In addition to suffering from the cloying pseudo-profundity of a Brooks Brothers (Arthur and David) proposal, Reeves’ suggestion also incidentally underlines how absurd the whole social mobility policy world really is.

When Reeves talks about bringing lower class kids into upper class workplaces, this is how he describes it:

Too many children end up in similar positions to their parents on the social and economic ladder. Given this, the case for exposing disadvantaged kids to white-collar jobs is pretty clear.

The idea here is that this kind of exposure will help the kids get one of these white-collar jobs as an adult, rather than ending up in the same position as their parents.

But, when Reeves talks about bringing upper class kids into lower class workplaces, he describes it this way:

Teenagers from affluent backgrounds often live in a bubble, surrounded by friends, neighbors and fellow students who share similar backgrounds. “Our kids are increasingly growing up with kids like them who have parents like us,” writes the Harvard social scientist Robert Putnam in his book Our Kids. He warns this represents “an incipient class apartheid.” It couldn’t hurt for upper-middle-class kids to step outside their bubble and spend a day in a working-class job.

So, for rich kids, the goal of this switcheroo is not to get them to take working-class jobs when they are adults. Rather, it is to give them a taste of how the other half lives in order to push back against social distance, or “class apartheid” in Putnam’s parlance.

But if rich kids are not going to be pushed downward into lower class jobs, then how will the poor kids progress upward into higher class jobs? Relative mobility requires upper class kids to descend the labor market hierarchy so that lower class kids can ascend it. Yet, Reeves’ own cutesy social mobility proposal betrays the brute reality that everyone secretly knows here: there is no way upper class parents are going to let that happen to their kids, certainly not in this society.

Social mobility policy and rhetoric is little more than a cruel show where we talk a big game about encouraging the disadvantaged to rise the ranks while fully knowing that rich parents will do absolutely everything in their power to keep that from happening. Brookings can invite 100 local DC public school students to their offices to meet Ron Haskins and hear him tell the war stories of how he gutted benefits for children like them, but unless Haskins is willing to raise his own kids to run a cashier at Walmart, no new spots at the top of the economic hierarchy will open up for those 100 kids to snag as adults.

None of this is to say that rich parents who do everything they can to give their kids every advantage in life are somehow doing something evil. Caring for and helping family and friends is a virtuous thing to do and a world where we demanded that people let those close to them flounder would be dystopian in many ways. But this is precisely the point: true social mobility would require an enormous level of restraint by rich parents when it comes to their children. And that is never going to happen.

What this means is that the primary focus of those interested in a fair economy should not be chasing some social mobility pipe dream. Rather, it should be on cramming down the income and wealth differences between the classes.