The key involves boosting the Earned Income Tax Credit, a quietly potent program.
Northern California Rep. Ro Khanna (D-CA) unveiled on Wednesday legislation that will give substantial tax credits to low- and middle-income Americans. His goals include combating two of the most troublesome aspects of the American economy: income stagnation within the working class and rising instability caused by a shift from secure jobs with benefits to jobs (or gigs) lacking them.
More broadly, he’s motivated by surging interest in Silicon Valley in using income redistribution as compensation for the costs imposed on workers by increasing automation.
The ambitious proposal from the freshman representative, which could cost $1.4 trillion over 10 years, would turbocharge a program that has enjoyed an unusual amount of bipartisan support since it was introduced in 1975: the Earned Income Tax Credit.
Sen. Sherrod Brown (D-OH) will introduce similar legislation in the Senate.
The EITC supplements the pay of low-earning households and incentivizes low-income people to work. (It’s designed “to make work pay,” as President Bill Clinton famously put it.) For tax year 2016, 26 million people received about $65.6 billion in credits.
The program works by providing refundable credits that begin with a small subsidy for the first dollar of earned income and gradually rise until — for a two-parent family with two kids — the subsidy reaches a maximum of about $5,600 for an income of $14,000. It stays at that level till income hits about $18,300, then begins to phase out.
Families with three kids get a little more, those with one a little less. Childless families get a very skimpy credit.
It’s a little tricky to describe in words; below is a graph from the Tax Policy Center showing how the current credit phases in and out with various family sizes.
The Khanna-Brown proposal, the Grow American Incomes Now Act (GAIN), would roughly double the current EITC for families with two kids, bringing it to a maximum of about $10,800. The proposal would continue the policy of being less generous to childless workers, but it would quintuple their maximum credit, taking it from $510 to $3,000.
“The large expansion of the EITC I am proposing would compensate for the loss of wages of the bottom 20 percent of wage earners since 1979,” Khanna told me, before his official announcement, scheduled for 12:30 pm Wednesday.
To give a sense of the level of subsidy we’re talking about, under Khanna’s proposal, a family with two kids earning a salary of $18,000 would get a credit worth more than $10,000 — a salary bump of some 55 percent.
Khanna knows the bill isn’t likely to pass a Republican-controlled Congress, but he’s hopeful that it could be serve as the basis of a Democratic plan to tackle inequality and the challenges of the new economy as we head toward the 2020 presidential race. And he thinks it will resonate with voters more than Republican tax cuts.
“There are a variety of ways to pay for such a large expansion of the EITC, including a financial transaction tax, closing special interest tax loopholes, and raising revenue from the top 1 percent of earners,” he recently explained. “I’m happy to have that conversation with my colleagues in Congress. I also look forward to learning more about the House Republican offsets to pay for their $5 to $7 trillion worth of tax cuts for corporations and the very wealthy.”
The general idea of expanding the EITC is not new: House Speaker Paul Ryan and President Barack Obama last year both floated EITC increases, though both were much more modest.
The EITC began as a small experiment in the 1970s. Now it’s a major anti-poverty program.
The EITC has undertaken an amazing journey from a wonky program introduced as a way to subsidize low-wage earners in the 1970s to one of the pillars of the American welfare state. It lifts an estimated 65 million people out of poverty. And Khanna’s proposal would take it to an entirely new level.
The tax credit enjoys broad bipartisan support: Liberal economists like its impact on reducing poverty through redistribution, while libertarian economists like it both because it spurs some people — particularly single parents — to enter the workforce and because it is inexpensive to administer. Overhead costs are under 2 percent, compared to 20 to 25 percent for a program like food stamps.
The policy grew out of debates in the 1960s over the best ways to combat poverty. The libertarian economist Milton Friedman championed a negative income tax, which he thought could outright replace many welfare programs of the day. A negative income tax would have, like the EITC, boosted the pay of low-income workers, but it would have gone farther by issuing payments to people with no income. (It would therefore, unlike the EITC, be a form of guaranteed income.)
President Richard Nixon went so far as to include a negative income tax — for families with children only — in his Family Assistance Plan of 1969. It passed the House but died in the Senate.
The idea of a negative income tax was fought by legislators who worried about subsidizing the “undeserving poor” as well as discouraging work. They pushed instead for a “work bonus” that would be reserved only for the employed. The Earned Income Tax Credit was passed and signed under President Gerald Ford. It has been expanded several times since — most notably during the 1986 tax reform, under President Ronald Reagan, and during President Clinton’s first term.
Economists and other analysts have identified several benefits of the program:
- One study found that a $1,000 increase in the EITC boosts employment a sizable 7 percentage points, and reduces the proportion of families below the poverty level, after taxes and other …read more