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Wednesday, January 22, 2014

'Brookings EITC Proposal Mostly Moves in the Wrong Direction'

As a follow-up to my recent article arguing that a combination of the minimum wage and EITC is the best approach to helping low income households:

Brookings EITC Proposal Mostly Moves in the Wrong Direction, by Shawn Fremstad, CEPR: [Shared via Creative Commons]: Isabel Sawhill and Quentin Karpilow of the Center on Children and Families at the Brookings Institution recently proposed what they call a “no-cost” way to reduce poverty and inequality. The proposal combines an increase in the minimum wage with some fairly radical and mostly unwise changes to the Earned Income Tax Credit.

It certainly makes sense to increase the minimum wage substantially. As economist Arindrajit Dube estimates in a new and very thorough working paper, such an increase would “reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.” It also makes sense to combine a minimum wage with increased social insurance. As Dube notes: “in the presence of [negative] incidence effects [of the EITC on wages] due to increased labor supply, the optimal policy calls for combining tax and transfers like the EITC with a minimum wage.”

At first glance, it may seem like the Brookings proposal follows Dube’s prescription, combining a minimum wage increase with expanded EITC benefits for certain workers, particularly:

  1. young adults (ages 21 to 39) who do not have dependent children and are working at least 1,500 hours a year (around 29 hours a week if working all 52 weeks),
  2. married couples that include two workers as long as the lower-earning spouse works at least 1000 hours a year (just under 20 hours a week if working all 52 weeks), and
  3. certain families with very young children.

At the same time, however, the proposal would cut EITC benefits for many workers in certain groups, including:

  1. those with more than one child,
  2. those with older children, and
  3. childless workers who are over age 39 or work less than 1,500 hours a year.

Although Sawhill and Karpilow aren’t as explicit as they should be about the extent of EITC cuts in their plan, they do acknowledge that it: “prioritizes full-time work over part-time employment, young children over big families, and young single adults over older ones.” It would be helpful for them to be even more transparent and explicitly quantify the distributional effects of their redesign. How many workers would see their EITC benefits cut and by how much, and how many would see increases?

The Sawhill/Karpilow proposal has a number of moving parts, but in the remainder of this post I’m just going to focus on the changes they propose to the childless worker credit. It would be a very good idea to increase the childless worker EITC (in conjunction with increasing the minimum wage and tying it to inflation or some other index). ...

But it would be a very bad idea to make the childless worker EITC, as well as the separate spousal credit Sawhill and Karpilow propose, contingent on working nearly 30 hours a week year-round (or nearly 20 hours a week for spouses). Given how far we are from full employment (current U-6 unemployment is 13.1 percent) and the extent of the decline in labor force participation over the last five years, it makes little sense to redesign the EITC in a way that (theoretically) increases incentives for workers to go from part-time to near-full-time employment, but reduces incentives for going from no employment to at least some employment.

Moreover, it makes little sense to penalize the many part-time workers who are working part-time for reasons that are quite sound and have positive externalities (caring for a family member with a disability or a child, going to school part-time, etc.) or for reasons beyond their control, such as a disability, illness, lack of available full-time work, etc. ...

Sawhill/Karpilow would also change age eligibility for the childless worker EITC (currently ages 25-64) by extending eligibility to workers age 21-24, but eliminating it for those age 40-64. They don’t provide any rationale for this cut, despite the extraordinary inequities it would create. A personal example: when my mother became a "childless worker" in her late 40s after the last of her children left the nest, she completed an A.A. degree with straight A’s, and then went on to work in a series of poorly compensated, dead-end jobs at K-Mart and in home health care, until serious health issues made even half-time work impossible. If the Sawhill/Karpilow proposal had been in place when she was still alive and working in her late 40s and early 50s, she would have lost eligibility for the modest EITC she received, while a 20-something worker doing the same work as her would have a received credit of around $1,600. 

Finally, while “target efficiency” isn't a particularly big concern of mine ... it should be noted that the ... target efficiency of the Sawhill/Karpilow EITC proposal is unclear. They say that the combination of raising the minimum wage and their EITC proposal would lift 3.4 million people out of poverty, but they don’t explain how much of this is due to the EITC proposal by itself. The Dube estimate I noted about suggests that the vast majority of the anti-poverty effect could be due to increasing the minimum wage. And various elements of the Sawhill/Kapilow proposal would cut EITC benefits for workers with below-poverty income..., while increasing them for other workers. 

We should increase the EITC, especially for workers without dependent children, and the minimum wage as a way to reduce poverty and inequality. But the Brookings plan is not the way to do it.

    Posted by on Wednesday, January 22, 2014 at 09:03 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (10)

          


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