Should We Help Low Income Families With Tax Credits or Direct Subsidies?
Public opinions polls have shown that about two-thirds of Americans think government should provide a helping hand to low-income working families. But how?
For many years, the answer was direct cash (or cash-like) assistance aimed at the poor, whether they worked or not, through programs such as Aid to Families with Dependent Children and Food Stamps. But beginning in the 1970s, the accelerating trend has been to target assistance to working families and to provide such aid through refundable tax credits rather than direct spending.
Economists see these as very similar and, in fact, often treat the tax credits as spending. But they are administered very differently. And public perceptions of these two models are sometimes at odds. Just note the recent furor over the Tax Policy Center’s estimate that 47 percent of Americans paid no federal income tax for 2009. The reason many didn’t pay was because these credits wiped out their income tax liability. But some critics rail against “half of Americans who paid no taxes” even though voters—and, thus, politicians–generally favor tax cuts over nearly identical spending. For lots more info on TPC's analysis of this issue, link here.
My TPC colleagues Eric Toder and Elaine Maag have their own perspectives on whether tax credits or spending is the way to go. In his post, Eric reminds us that Don Alexander, a highly respected IRS commissioner in the Nixon and Ford administrations, strongly believed his agency should collect taxes and not administer social programs:
He was not opposed in principle to federal subsidies for low-income working families. But he believed that the purpose of the tax code was simply to raise revenue to fund public programs and that it was not the IRS’ job to administer social programs.
Perception matters. Tax wonks can argue until they are blue in the face that these programs are spending and that recipients of these subsidies are really paying positive taxes before getting their benefits. I totally agree with this logic, but it is a tough sell.
So we may have to reconsider how we provide benefits to low-income and other households. People will look at how much different taxpayers remit to the IRS – no matter how much we explain that some provisions are really spending, not taxes, or that the real beneficiaries are not always those who send a smaller check to the IRS. As the behavioral economists now remind us, perception often counts as much or more than reality.
In her post, Elaine argues that the system of refundable credits works pretty well (if not perfectly) both for government and for those families receiving the tax benefits. And, she concludes, the IRS is better equipped to manage these programs than other agencies:
We don’t have to deliver benefits through the tax system. Show me a tax credit and I can design a spending program to do the same thing. But sometimes the tax system is the best delivery mechanism. For starters, it’s administratively convenient. The IRS has relatively reliable information on earnings (the foundation for all of these credits) provided by employers so it is easier for the IRS to determine eligibility than another agency. It costs much less to run these programs than to operate traditional welfare. Unless your goal is to maximize bureaucracy, you should be cheered by this advantage.
Second, it is much easier for working families to claim tax credits than to apply for traditional welfare. Virtually all of the recipients would file income tax returns even if the credits did not exist (for example, to claim refunds of over-withheld income taxes) so they’re already in the system. And there’s no need for someone to miss a day of work standing in line at the welfare office. Finally, the negative stigma attached to traditional welfare programs doesn’t exist with EITC, CTC, and MWP credits because the benefits are not limited only to low-income families and there is no invasive interview as a prerequisite for receipt. The result: More eligible families receive the EITC than Temporary Assistance for Needy Families (the program enacted in 1997 that replaced the previous welfare program) or Supplemental Nutrition Assistance Program (formerly Food Stamps).
The debate over how to provide government subsides is provocative and important. And the outcome will help drive not only short-term tax policy but how we think about broad-based reforms in the revenue system.
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Get rid of mimnum wage make people responsible for them selves
Also, any time the “40% don't pay taxes” red herring is mentioned, it should be accompanied by the facts that include payroll, state, and local taxes, all of which in aggregate are profoundly regressive. Above about $70 or $80K in annual income, our country's tax system is essentially nonprogressive.
Based on all my research — notable being Lane Kenworthy's work (see for instance the last chapter of Egalitarian Capitalism) — I think the Earned Income Tax Credit is the best redistribution program we have, and it should be expanded. (Even Milton Friedman was for a negative income tax, and the “earned” requirement does him one better.)
However, its “salience” should be increased by doling it out via weekly paychecks (as deductions are done now), which would be 1. a powerful incentive to work and 2. a powerful incentive for employers to hire.
Accounting is a separate issue. These credits should be put on the expense side of the ledger, not deducted from the revenue side. There's a movement to better account for “tax expenditures,” but the reporting could be vastly improved.
If the Democrats had played it smarter, they would have passed DC Statehood when they had 60 votes, giving them 62 votes and a one vote cushion now with the election of Scott Brown. Ooops.
Most job programs are a joke. The chronically unemployable need to get basic skills at a remedial high school and get their subsistence payments through the school.
Mandating family planning won't pass the smell test. Indeed, Catholic Democrats and Republicans will both vote no – for social justice reasons. Stay out of people's bedrooms – it smacks to eugenics.
I fail to see how having bureaucrats on the public dole for child care or housing is fiscally conservative. It is better to use the system to make sure each middle class family, whether they work, are on unemployment or are in remedial training, than to perpetuate a welfare infrastructure. It is also better to give this tax benefit to families than a larger mortgage interest benefit for McMansions.
See my blog about the “47 percent who don't pay federal income taxes”. I am not for ANY refundable tax credits. This whole “need-based/entitlement” deal needs to change. Instead of having a stigmatizing program called “Welfare/AFDC” and instead of EIC and all this other money-wasting nonsense, everything should run through the unemployment office. Those who have been “living on welfare” should be required to prove they are looking for work just like those who have been laid off. If they are uneducated, our tax dollars should go toward literacy and job training. Those who are unwilling to participate in these programs should not receive checks. Just like there's public housing, there should be public childcare – for those who excuse-make about not bettering themselves because they can't get a babysitter. They additionally should be required to participate in family planning programs. They should be “de-incented” from increasing dependents in their household by notifying each “recipient”, the maximum amount of benefits they will receive – dollar for dollar. And it should be tight, just like it is for unemployment recipients. Why should they be made comfortable when those who are simply laid off cannot be??
I would go even further and consolidate all benefits for households – from the mortgage deduction to the property tax deduction and from the exemption for children to the EIC – as well as TANF and Food stamps, into one much larger Child Tax Credit of $500 per month to be paid with either participation in an educational program or for working as an adjustment to salary. I would not cap this credit.
Rich people would like lose out a bit on their mortgage deductions and local goverments would be denied cover for higher property taxes, but would likely still buy as much real estate anyway. Indeed, I wonder how much these provisions are used by landlords – using these deductions as an offset for rental income.