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.

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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.

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.