Where Deep Child Poverty Comes From

As a follow up to my EITC post yesterday, I want to emphasize that one problem with the EITC is actually present in every single child tax benefit we have. In one form or another, all child tax benefits we have are earnings-related, meaning the lower your earnings, the less you get. This design, which weirdly has bipartisan support, is where our deep child poverty comes from.

By now most people who follow tax policy know that many of our tax programs are designed in horrible ways that unfairly distribute benefits to richer people rather than to poorer people. Normally, people who make this point focus on things like the mortgage interest tax deduction or tax exclusions for individual retirement accounts and 401ks. But the critique equally applies to the country’s child tax benefits, even though those benefits receive far less negative attention.

To see what I mean, consider the following graphs of three child tax benefits. The graphs are based on what benefits a 1-parent, 2-child family would receive based on their earnings. The red arrow in each graph shows you who is being excluded from the benefit.

Screen Shot 2017-04-30 at 12.03.47 PM

Screen Shot 2017-04-30 at 12.04.05 PM

Screen Shot 2017-04-30 at 12.04.15 PM

Although I did not include them above, the head of household filing status and the child and dependent care tax credit have the exact same problem. For all five benefits, legislators decided that children with low-earning parents should starve. And they do.

As I noted in my EITC post, these designs are absurd on their face because children of low-earners have no less need for benefits than children of high-earners. Indeed, it’s the opposite. Furthermore, children have no say over what their parents’ earnings are. The fairness case for universal benefits when it comes to children is overwhelming.

Doubling down on earnings-related child benefits, as proponents of EITC expansion do and even as proponents of CTC expansion often do (see Hillary Clinton), is a terrible idea. Instead, we should scrap all of the child benefits in the tax code and pay out a universal per-child benefit to every family with children.

In the case of the EITC, this would mean eliminating the child-related components of the program and having a pure wage subsidy program that pays out the same benefits to all adults with the same earnings regardless of how many children they have. In the case of the other four child tax benefit programs mentioned above, this would mean eliminating them entirely and plowing the savings (plus other money) into the universal child benefit program.

Transfer Programs and Black Poverty

A person is in poverty whenever the following is true of their income situation:

(Market Income + Transfer Income - Taxes) < Poverty Threshold

Thus, there are three ways to lift someone out of poverty:

  1. Increase their market income.
  2. Increase their transfer income
  3. Reduce their taxes.

Given that the poor do not pay much tax in the US, there are two basic channels for poverty reduction: market income or transfer income.

Due to various racist mechanisms, the market income channel presents Blacks with unique difficulties. The transfer income channel does not. Thus, it seems that anti-poverty strategies focused on transfer incomes are the most helpful to Black people and the most sensitive to the unique income challenges experienced by Black people. This is not to say that efforts shouldn't be made to deal with the market income obstacles. Obviously they should. It's just to say that, given that those obstacles currently exist, it's clear that anti-poverty strategies centered around market income are structurally biased against Black people and really all people who are structurally prevented from full labor market participation.

This is my pro-transfer take. But it's apparently not universally subscribed to. At Seven Scribes, Vann R. Newkirk II reaches the opposite conclusion about the racial dynamics of transfer programs:

[1.] While much of the safety net, save TANF, is not explicitly designed as such, the central conceit of anti-poverty programs is that a temporary injection of resources can help families rebound from poverty back above the threshold where they can pay for living unassisted again. Life above this threshold is generally considered some variation of lower-middle class. The logic checks out for poverty at large.

[2.] And the math checks out too. After Lyndon B. Johnson’s “War on Poverty” reforms, the national supplemental poverty rate–which takes into account a broader range of income as well as taxes and other expenses–decreased by an astonishing ten percentage points! This is good. Even as the age of inequality grips America, the basic assumptions of lifting people out of poverty–providing immediate living aid, health coverage, jobs, education, and housing–would probably do a decent job at it if we invested enough in it. For now at least.

[3.] But these proposals alone don’t quite work for black poverty. Black poverty is best understood as a societal-level phenomenon by which black people are in a sense predestined to poverty. Social mobility for white people is only loosely assortative; while the most poor white people and most wealthy white people are most likely to stay in their income ranges for life, there are good chances that people of any income range can wind up in another one. White children born in the middle three income quintiles can expect about a 25% lifetime chance of moving to another of the middle income ranges or even to the highest range. The only real rule here is that white people who aren’t born poor are unlikely candidates of ever becoming poor.

In paragraph one, Newkirk says that the purpose of transfer programs is to buffer you until you can get out of poverty by getting your market income to go up. In paragraph three (and elsewhere), Newkirk notes that Blacks face unique challenges in getting their market income to go up. Thus, he concludes that transfer programs don't really get the job done for Blacks.

But this argument is backwards. The purpose of transfer income is not to increase market income. These are separate income channels. By cramming the two channels together in the analytical way that he does, Newkirk uses the existence of racist barriers to market income mobility to take down all anti-poverty strategies, even transfer strategies that do not rely upon market income mobility to work.

The reason why Newkirk crammed transfer income and market income mechanisms together is explained by the text in paragraph two. In paragraph two, Newkirk claims that the Columbia Poverty Measure (CPM) confirms the point he made in paragraph one about the poverty-reducing nature of transfer income. But the CPM doesn't do that. In fact, it does the opposite.

Recall that Newkirk's theory of transfers is that they temporarily buffer you so that you can get out of poverty by increasing your market income. If this was the mechanism by which transfers cut poverty, then you would expect the War On Poverty reforms to have cut market poverty, i.e. poverty measured at the market distribution of income. But the CPM shows that this is not what happened. In fact, under the CPM, market poverty slightly increased over the period. The sole reason poverty fell was because higher transfers gave many populations with low market incomes enough extra income to put them over the poverty threshold. Put simply: the War On Poverty transfers worked by directly pushing people over the poverty line, not by indirectly boosting their market incomes.

dajoi-fig-1

So, contrary to Newkirk's argument, the CPM shows us that transfer incomes are perfectly capable of reducing poverty even without increasing upward market income mobility. Thus, the fact that Blacks face structural barriers to market income mobility is not an argument against the effectiveness of transfers for Blacks; rather, it's a very strong argument for the effectiveness of transfers for Blacks. Transfer-heavy approaches are more responsive to the nature of Black poverty precisely because poor Blacks face bigger market income mobility barriers than poor Whites do.

Arguments about Capitalism and Poverty

There is an argument about capitalism and poverty you see from time to time that goes like this. Capitalism is the greatest economic system for poverty reduction. Just look at developing countries like China or indeed the history of developed countries. Where capitalism flourishes, poverty plummets. Thus, those anti-poverty campaigners who criticize capitalism have it all wrong and should not be advocating other forms of economic organization — whether socialist, social democratic, or otherwise — as solutions to poverty.

One can certainly quibble with this basic presentation, especially when made in its most simplified form. Russia and Eastern Bloc countries have, for the most part, not fared better under more liberal economic institutions. Most of the poverty reduction we’ve seen of late has come in China, and their odd amalgam of authoritarian, one-party Communist rule with significant foreign direct investment is hardly a liberal capitalist poster child. Historically, increases in national income per capita are driven, obviously, by improvements in productivity, which is made possible by the discovery of new technologies (such as those of the industrial revolution), not by writing capitalist rules into law books. After all, the Soviet Union was able to massively ramp up productivity by adopting industrial technologies, at least for a time.

But putting all of that aside, there is a more obvious problem with this whole line of argument. The problem is that there is no necessary tension between the views that 1) market capitalist institutions can cut down a lot of poverty by increasing labor income levels, and 2) there are many populations of people that market capitalist institutions will fail to lift out of poverty. Specifically, increasing labor income levels will provide only limited help to those who are not able to receive labor income. As it turns out, this describes around half of the population in a given society. Children, elderly, disabled, students, caretakers, and the unemployed are typically not in a position to pull down labor income directly and are thus left out of capitalism’s touted poverty-reduction mechanism, at least to a significant degree.

According to my own research, these populations — children, elderly, disabled, students, caretakers, and the involuntary unemployed — make up 85-90% of those living beneath the official US poverty line at the market distribution of income.

The capitalist partisan who argues in this manner seems to be saying “look at how much poverty I reduced, I took the poverty rate from 90% to 15%.” Then the socialist says “we need different institutions to go below 15%,” at which point the capitalist points back to the reduction from 90% to 15% as if that’s a rebuttal to the socialist’s point. But it is not. That’s not to say there is no way to argue against the socialist’s prescription, only that this is not one of them.

The political spectrum between the far left to moderate social democrat generally maintains, among other things, that the eradication of poverty (and indeed income distribution fairness) requires that non-market incomes be paid to populations that don’t receive labor incomes, such as the aged, the sick, the disabled, children (their parents), and the unemployed. This grows specifically out of the view that capitalism often fails to reach these people and that this failure will lead to significant poverty. This seems exactly correct to me and I’m not sure why certain capitalist partisans think they are rebutting it by pointing back to the poverty reduction that happens during the run-up of labor incomes in poor countries.