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Lots of plans to boost tax credits: which is best?

许多增加税收抵免的计划:哪一个最好?

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【来源】: 布鲁金斯学会
【时间】: 2019-01-17
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Recent tax credit proposals to help low- and middle-income families, such as Senator Kamala Harris’ LIFT the Middle Class Act, are being hotly debated. We examine the ability of these proposals, the current earned income tax credit (EITC), and the child tax credit (CTC) to achieve three goals: reducing poverty, making work pay, and supporting children. While these goals overlap, it would be a mistake to ignore the tradeoffs involved when deciding which goal to prioritize. In this context, the EITC stands out: it reduces poverty, supports work, and supports children. Efforts to expand the EITC, specifically the GAIN Actproposed by Senator Sherrod Brown and Representative Ro Khanna, thus also have strong appeal. A worker tax credit is also promising, specifically to support work. Recent expansions to the CTC are not likely to be socially beneficial, especially given their costs, but there is a strong case to reform the CTC to better target poor families.

Three goals for tax credits

Reducing Poverty. The EITC and the refundable portion of the child tax credit have been very effective in reducing poverty. In 2017, these credits lifted 8.3 million people out of poverty, including 4.5 million children.

In fact, families in the lower end of the income distribution have seen their incomes rise mainly due to tax credits and other government transfers. For the bottom quintile, incomes after taxes and transfers increased by 79 percent from 1979 to 2015. This good news has led some to argue that President Johnson’s War on Poverty has been won. While that conclusion may be too strong, the EITC, SNAP, Medicaid, and some smaller safety net programs have clearly made a big difference.

Making Work Pay. Wages for less-educated workers have stagnated since the 1970s. This fact along with the exit of many men from the labor force has made work more central than ever to the policy debate.

While the EITC has had strong positive effects on employment and labor force participation, these effects have largely been among single mothers. According to Meyer and Rosenbaum, the EITC expansions from 1984 to 1996 accounted for over 60 percent of the increase in annual employment rates among single mothers during this period. The EITC is less equipped, however, to increase hours of work or to encourage a second earner to join the labor force. And because the benefits for individuals without children are currently very small, there has been considerable interest in expanding the credit to all low-wage workers in hopes that this might affect their employment rates as well. A recent randomized controlled trial testing an expansion of the EITC for childless workers did find modest increases in employment, but these increases were largely concentrated among women.

One reason for low take-home pay is the big bite that payroll taxes and child care or other work-related expenses take out of a modest paycheck. Indeed, the original purpose of the EITC was to offset the burden of payroll taxes on low-income workers, but there are many workers who, while low-paid, do not qualify for the EITC—either because they are just above the eligibility threshold and/or do not have children—and who end up paying a higher proportion of their income in taxes than those higher up the income scale.

Related Content Up Front Top ten 2018 reads on the Future of the Middle Class Up Front The middle class needs a tax cut: Trump didn’t give it to them

Beyond its economic benefits, work has social, emotional, and psychological benefits. Declining labor force participation among men has been correlated with rising rates of early death and less marriage. Policies that can effectively encourage and reward work are politically appealing and can benefit the economy, individuals, and communities.

The inherent value of work was emphasized many years ago by the Nobel-prize winning economist Edmund Phelps. In his book Rewarding Work, he proposed a robust program of wage subsidies that would top up the pay of all low-wage workers. The Making Work Pay tax credit, part of the American Recovery and Reinvestment Act of 2009, is a recent example of a tax credit directly targeted at raising wages. The idea has resurfaced in recent debates. For example, in The Once and Future Worker, Oren Cass proposes a wage subsidy. In 2015, Elaine Maag proposed a worker tax credit. Similarly, in The Forgotten Americans, Isabel Sawhill proposes a worker tax credit. Unlike the EITC, these proposals are based on individual earnings rather than on family income, family structure, and the number of children in a family.

Elaine Maag has aptly summarized the benefits of a worker credit based on personal rather than household earnings and why it might be better than simply expanding the EITC. The EITC provides little or no work incentive for individuals without children, discourages work by second earners, creates marriage penalties for some couples, and, because of its complexity, delivers more than a quarter of payments in error. These high error rates are related primarily to the difficulty of determining who is a qualifying child given considerable instability in living arrangements among low-income families. Personal earnings, in contrast, are easier to verify.

Supporting Children. Some argue that society benefits from having more children and, therefore, that the costs of raising children should be spread over the entire population. This idea of children as a public good is often invoked in the context of paying for entitlement programs such as Social Security. Because each working-age generation pays for the retirement benefits of the prior generation, if fertility declines or longevity rises, the payroll tax burden of supporting the elderly population will rise. Put another way, the cost to parents of raising children are mostly private, but produce public benefits in the form of a more fiscally sustainable retirement system and more economic growth. However, Sawhill has argued that modest changes to the tax system are unlikely to affect fertility, that children are already heavily subsidized (via expenditures on their education and health care), that another way to increase the number of workers per retiree is to allow more immigrants into the country, and that higher fertility has costs as well as benefits—environmental costs in particular.

The tax system used to have a personal exemption tied to the number of children in a family. In 2017, that exemption was eliminated and replaced by reforming the child tax credit, including doubling the credit amount from $1,000 to $2,000 and extending eligibility to higher-income families, at a (marginal) cost of over $68 billion per year. Although the credit is partially refundable at the bottom, this expansion mainly benefited middle- and upper-income households. Whether such expenditures are justified or not depends largely on whether one believes children are a public good and also on whether parenthood limits one’s ability to pay taxes or, instead, is a matter of choice like any other expenditure of funds, and thus not deserving of special support.

To be clear, we are not here talking about disadvantaged children who may benefit when tax credits enable their families to escape poverty. We are talking about tax credits that go to 91 percent of all families with children, as in the case of the current child tax credit. Given its high cost, it’s worth taking a harder look at its rationale.

Current Law

The primary tax credits affecting families in current law are the earned income tax credit and the child tax credit. The first is primarily aimed at reducing poverty and the second at supporting children. There is, at present, no tax credit whose primary objective is to encourage work.

Here we briefly review the details of the EITC and the CTC before looking at several recent proposals to amend current law.

Earned Income Tax Credit

The earned income tax credit was signed into law by President Ford in 1975 and has been subsequently expanded several times.

The size of the EITC is dependent on earnings, on the presence and number of children, and on marital status. The graph below shows the EITC schedule for