Subject: EITC: The Right-Left Reversal EITC: The Right-Left Reversal IN THE BEGINNING The Earned Income Tax Credit was first proposed by conservative economist Milton Friedman in chapter 12 of his 1962 book CAPITALISM & FREEDOM (University of Chicago Press). He called his proposal the "negative income tax", and the chapter title was "The Alleviation of Poverty". Friedman's theory was that poor people were poor because they didn't have enough money. Working people with low income would not only not pay income tax, they would get a refund. It would decrease with increasing income, become zero, and then become a tax to be paid (the positive income tax), but in a gradual enough way to always provide an incentive to earn more. The "liberal" idea then was to spend a lot of money to create a vast federal bureaucracy with separate agencies to deal with each different aspect of poverty (HUD to build and manage housing for the poor, food stamps to feed the poor, etc.) This way the federal welfare system would provide for the poor as long as they stay poor. They get AFDC if they have kids. There are extra benefits to not get married, and benefits are cut off if they earn "too much" money. The Friedman idea was ridiculed by Hubert Humphery and most "liberal" politicians, but was pushed by most "conservatives". It was implemented on a limited basis during Nixon- Ford Administration and expanded during the Reagan-Bush years under the name EARNED INCOME TAX CREDIT (EITC). President Reagan called EITC "the best anti-poverty, the best pro-family, the best job creation measure to come out of the Congress". President Clinton also expanded the EITC. But it was seen as a threat to the welfare state concept by some on the left: instead of bureaucrats rewarding people for NOT working, EITC was going to those who found a job. And with that money, they were less dependent on the welfare system. And the money went directly to the people who needed it not to well paid federal employees. I hope you saw the recent post on "Welfare: Who REALLY Benefits?" by DonBlis160@aol.com on a.p.e. It is included next on my web page. THE STRANGE REVERSAL With the election of a Republican congress in 1994, I thought we would see the triumph of Friedman's idea by replacing the negative incentive welfare system with an expansion of the "negative income tax" EITC. Instead, the new congress had chosen to keep food stamps and other aspects of the current welfare system and REDUCE EITC! They have even voted to keep paying single girls to have more babies (AFDC), but they won't expand the incentive to get married or to work. Instead of expanding the Reagan Revolution, they want to repeal it. The new Congress seems to think EITC is "another welfare program" and an expense; they don't seem to realize it can REPLACE the existing welfare system, (and the minimum wage law). With proper implementation it can provide incentive to work and insure that those who do work have enough to live. It can be structured to provide people at any income level an incentive to earn more without loss of benefits, and without funding a vast "welfare bureaucracy". It did result is some income tax cheating by the poor, but this has always been a problem, usually by the rich. This can be monitored by the IRS as always, and is not a reason to scrap EITC in favor of welfare (which is at least as subject to abuse). WHY NOT?? The main "disadvantage" is that the cost is up front and open, now over $20 billion. Opponents claim that it is better to just raise the minimum wage, since that gives the working poor money and "doesn't cost anything" (no kidding, I have actually read congressmen saying that!) Also, EITC benefits only the working poor. Other welfare programs have interest groups to lobby for them; farmers for food stamps, labor unions for Public Housing (which they are paid high wages to build, to repair, and to demolish when the units become too crime ridden to live in), and Federal Employee unions for the administrators and social workers, etc. And to complete the reversal, it is now "Liberals" who are calling for keeping and expanding EITC. My reply to comments by wfcooper@tiac.com Re: EITC and the Left-Right Reversal Hi, I have been considering your doubts about the connection (or rather LACK of one) between incentive and behavior. You don't think single women have more babies now just BECAUSE the government pays them to. Or as a liberal friend insists on saying it, "the government does NOT pay them TO have kids!! It only pays them IF they have kids!" He thinks this is completely different. DO WE "GET WHAT WE PAY FOR?" The Earned Income Tax Credit (EITC) provides an incentive to get a job. Even a low pay job. I think we both agree that to provide incentive for someone to earn more at every level of income, it will cost more money than it does now: there should be only a 15% reduction in the base (of around $4000) until the EITC is zero at an income of about $26,000, and then switches to a positive tax of 15%. It is consistent with either a "flat tax" or a "progressive" one. By contrast, the various welfare programs, low income housing, food stamps, AFDC etc. provide an incentive to stay poor: benefits are lost in big jumps for various small gains in income at various threshold levels. These programs exist not because there is a rational basis for them but because there are powerful interest groups to lobby for them, as my previous post described. Conservative Republicans have long been describing this situation, but when in control they are maintaining the welfare programs (at a reduced level perhaps), and cutting rather than expanding EITC. Do people change their behavior in response to incentive? It is usually only "idealists" who don't see the connection. We got the 91% income tax rate after WWII largely because the congress thought people would continue to work and report large incomes and pay the tax. They didn't. I think the reduction of the top rate to 28% during the 1980's demonstrated that the way to get the "rich" to pay more is to change the incentives. WHAT ABOUT THE POOR? Some say that the rich understand and change behavior in response to incentives (that's why they are rich!), but the poor do not (what's why they are poor?) Perhaps. But when having children out of wedlock was punished/not rewarded it was rare (about 5% of births prior to the Great Society). Since then it has risen pretty much in proportion to greater rewards. Sweden offers even more generous benefits to single mothers, and now over half of the children born there are to unmarried women. In the US that figure is "only" about 30% and rising. Is the goal here to catch Sweden? The only evidence I have seen to dispute this "getting what you pay for" thesis is a comparison of AFDC payments between states, which claims no correlation between women having kids and the dollar value of the AFDC they get. Some states with lower AFDC have higher birth rates. But the value of AFDC was not corrected for purchasing power: a dollar in rural Mississippi or the mid-west is MORE than a dollar in New York City. If you take that into account, the picture looks different. If anything, the "poverty factor" seems to me to work the other way: Poverty is often given as the excuse for unmarried moms (they can't afford to get married). But during the Great Depression here, and in poor countries around the world, people get married BEFORE having kids. And to make my position clear: the problem is single women having kids not poor married couples having kids. IS THE ANSWER IN NEW JERSEY? Since New Jersey refused to give more benefits to women on welfare who have more kids, the welfare birth rate has dropped, but the abortion rate has risen (at least that was reported in a news story). If that proves to be the case (and if you believe in incentives it sounds logical), this will pose a problem for "pro-life" conservatives. Which is more important, reducing fatherless kids living in poverty, or stopping abortion? They may have to choose. Date: Mon, 11 Dec 95 08:27:36 CST From: "jim blair" To: wfcooper@tiac.com Cc: BCc: Subject: Re: EITC: The Right-Left Reversal In Message Fri, 08 Dec 1995 18:23:54 GMT, wfcooper@tiac.com (Bill Cooper) writes: >On Wed, 29 Nov 95 23:43:04 CST , you wrote: > >>Hi, >>Well USA TODAY, Tuesday Nov 28,(p4A) has an article "Fairness of >>Family Tax Credit Questioned" that you would be interested in. The >>proposed $500 child credit would be deducted from tax owed (ie cannot be >>a Negative Tax), in line with your idea. >> >>But it was offered in exchange for a cut in EITC, and the cost of the credit >>is to come from the EITC cut. So from an "incentive" standpoint the issue >>is still: does the Congress want people to work or to have kids? >> >>And since there are many low income working families who don't have >>kids, the fairness of this is being challenged. >> >>I did not mean to imply that financial/tax incentives are the ONLY behavior >>modifiers, and yes I think there is such a thing as cultural atmosphere. It is >>shaped by many things (Hollywood, sports stars, radio and TV, etc). But to >>pay people when they do something is both a direct incentive and also a >>way to say that "it is OK". And high school girls today are very much >>aware that today having kids is "OK", in fact a way to get special attention >>as well as money. >> >>On the poverty "causes" the poor to have bastards, it is generally the rich >>countries that can afford to pay single women that have the high "out of >>wedlock" birth rates. Sweden, Denmark and USA have the high rates, poor >>countries like Korea or Mexico have most of their kids raised by married >>couples. In the US the rate was only about 5% during the GREAT >>DEPRESSION. It looks more like wealth is a CAUSE of the problem!! >>We can now afford to have a large number of kids raised without fathers. >> >>And while older, I too lived through the 1960's, and I don't think attitudes >>about sex will ever go back to what they were in the earlier era. But to be >>realistic, the PROBLEM is not really sex but women having babies they >>can not afford--well can now barely afford BECAUSE AFDC makes it >>possible. But since "the pill" and Roe v Wade, sex does not need to >>translate into babies. This is the point where "conservatives" have a >>problem: many oppose abortion and some still oppose birth control, but >>they also oppose fatherless kids. I think they will have to decide which they oppose more. > >Hi Jim, > Thanks for the tip on the article in USA today. It pretty much >confirmed what I had heard from other sources, though that table >comparing the tax expenditures involved in the $500/child tax credit >and the capital gains reduction was confusing (frankly, it just seemed >wrong to me). > I've heard the complaint about couples without children not >getting any tax relief before, but I honestly think it's a little >misplaced. Clearly for folks of moderate means the SSI tax and local >sales taxes have greater impact than the income tax. It seems to me >that in order to give substantial tax relief to folks of moderate >means you either have to expand EITC greatly or fold the SSI tax into >the rest of the tax structure. Obviously couples or singles who are >of greater than moderate means aren't given tax relief and I don't >particularly think they should (To be more accurate, I think that >there pretty far down the list). > I kind of agree with you on the signaling effect of incentives to >have children. Obviously a society that truly abhorred having children >out of wedlock wouldn't enact this kind of provision. On the other >hand we don't live in a society that abhors illegitimacy. Governance >has to reflect that reality. This bind is what I was trying to get at >with my digression about sexual mores. > If I indicated that I thought that poverty causes illegitimacy, >it was very poor communication on my part. I do think that wealth is >largely irrelevant (and to the extent that wealthy societies can >afford social experimentation that no poor society would ever dream of >may exacerbate the situation). The countries that you list as having >the greatest problem with illegitimacy (U.S., Sweden, Denmark, also >Iceland and the U.K.) are in many ways the countries that are furthest >down the road of modernity. Italy, for example (Japan also) are very >wealthy societies were the rate of illegitimacy is still low, >precisely because they have retained traditional societal structures >(strong families, low divorce rate and relatively few women involved >permanently in the work force). I don't know the statistics for >Ireland, but I suspect that their recent decision to liberalize >abortion is asking for trouble. > My suspicion, from what I've read about the EITC and the >$500/child credit is that the intention, in neither situation >(obviously) is to encourage single women to have children. Frankly, I >think that the intention behind the $500/child credit is to make it >easier for women to remain at home (who are married). Obviously poor >single women are totally unaffected by this change. This might be a >positive change, it's hard to say. As for EITC, I gather that many >congress-people are uncomfortable with the "negative" aspect of EITC >(i.e. that refunds are greater than taxes paid). Again I think this >problem largely arises from the separation of SSI from the rest of the >federal tax stream. Most EITC advocates have argued that EITC offsets >the SSI tax, not the regular income tax. > I think the knotty part of this whole discussion, is what the >role of government should be in dealing with the problems caused by >negative social trends. If government is too active in dealing with >the problems, it seems that it is encouraging the underlying social >change. If it ignores the problem it courts social breakdown. I'm >beginning to think that the solution will lie in devising treatments >for the symptoms while simultaneously trying to dampen the wave of >social change (and for god's sake let's forego any more change till >we've dealt with our current set of problems: maybe our largest fault >is that we're so much better at identifying needed social change than >we are dealing with the unintended consequences of that change.). > >Have a nice weekend, > >Bill Cooper Hi, Just a few more items. I just learned that the child tax credit proposed now not only does not have a "negative" tax feature but will not even apply to families that earn less than about $20,000 per year: that is, the income tax due must exceed $1000 before the credit applies. So poor families with kids will lose their EITC, and won't get the child credit. I suspect this is SO unfair to the working poor that Clinton will make it a campaign issue. Yes, social security is also about as unfair as a tax can be: a "flat tax" that applies only to the first $65,000 earned. But this was created by FDR and "liberal" Democrats. (I think you are confusing FICA (social security) with SSI, an appendix to it that pays the disabled. SSI was easy to add on since everyone wants to help the wheel-chair bound, but lately it is being used to provide "disabled" drug addicts with money for dope and alcoholics with booze. Sorry, I didn't mean YOU claimed that "poverty is the cause of illegetimate kids": but a conversation never goes very far on the topic before that (absurd) claim is heard. I just read today in the paper that congress wants to provide more money to the Agriculture Dept to buy food to give to "the poor". This is just the sort of program the EITC was supposed to REPLACE. Congress wants to pay the poor to stay poor, but it won't spend the same money to help them to help themselves. POST SCRIPT PS: Bill Cooper claimed (and I agree) that a major limitation to the EITC is that the tax refund is just once a year. Hard to budget a once a year lump of income. He suggested a "negative witholding" of the negative tax. The IRS has no problem with "positive witholding" (or quarterly payments on the income tax expected to be due). This is the sort of thing that should be debated in place of an increase in the minimum wage if Congress REALLY wanted to help the "working poor". Arkansas Congressman Tim Hutchinson has proposed something along this line, currently called the "Minimum Wage for Families Act", he now wishes he had called it the "Working Families Support Act". It would supplement the earnimgs of low wage workers on a monthly basis, but only if they have children. Can't Republicans figure out that poor people without kids need money too? And Democrats are not likely to go for it, since it would undercut the Welfare Bureaucracy that they love. And BOTH parties would object to the cost, which would be out in the open. Easier to sell a minimum wage increase, which "raises the pay for the poor and dosen't cost anything". . ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) Jim Blair (jeblair@facstaff.wisc.edu) University of Wisconsin, Madison (USA). For a good time, call http://www.execpc.com/~jeblair/index.html "This message is brought to you using biodegradable binary bits and 100 % recycled bandwidth." AND To: OCWC Newsgroups: alt.politics.economics, sci.econ References: 1 , 2 , 3 , 4 someone: I haven't heard of anyone pushing a wage subsidy to replace the mw. The EIC is currently far too small and narrow, from my understanding of it, to accomplish what a wage subsidy could. OCWC wrote: > > First of all, it is not necessary to end the minimum wage to put a wage > subsidy or EITC into place. Both have the effect of increasing total money > going to the target group. Second, you're comparing what a wage subsidy > COULD do to what the earned income tax credit IS doing. True, the wage > subsidy could do more, but so could an enhanced tax credit. Really generous > assistance packages just don't seem to be America's way of doing things. Hi, The last time I heard any serious discussion of how to help the working poor was when Bush vetoed the minimum wage increase that Congress passed. There was then discussion of alternatives, mostly of increasing the EITC and ending its sharp cutoff: a minumum family income that would never impose a high tax increase for having a higher income. They were actually debating these ideas in Congress(!!) But the supports of the minimum re-submitted a slightly smaller increase, and this time Bush signed it, ending all serious discussion of the problem. So I think there is an "either/or" relationship between the mw, and help for the working poor. On "generous assistance packages" the debate noted above was making clear to many congressmen that the EITC was MUCH more "cost effective" than the various other programs designed to "help the poor" (but where most of the money goes to various people who are not "poor" by any standard. -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834