How Rubio’s Anti-Poverty Plan Could Help Improve Aid to Low-Income Workers

By :: January 28th, 2014

Senator Marco Rubio (R-FL) has offered the outlines of an ambitious plan that he says would end poverty. One creative piece: Replace the well-known and highly effective earned income tax credit (EITC) with a monthly “federal wage enhancement” for all individuals with qualifying low-wage jobs.

It is a bold idea. The EITC, along with the refundable child tax credit (CTC) lifted 10.1 million people out of poverty in 2012, including 5.3 million children. But the EITC has some major shortcomings: It does very little to help low-income workers without kids (mostly single men) and most recipients only get much-needed cash when they file their tax returns. Rubio’s plan seems aimed at addressing both issues.

An individual worker credit makes a lot of sense. Policymakers from the Bush tax reform plan to the Bipartisan Policy Center proposed expanding worker credits to include families without children. My colleagues and I at the Tax Policy Center have done a fair amount of work on this idea as well. See this and this.

Although the current childless EITC reaches some very low-income workers, the maximum benefit is less than $500, a fraction of the supplement available to families with children. The maximum EITC for families with children varies from $3,305 - $6,143 in 2014, depending on the number of children eligible for the credit. Childless families are the only households that still regularly face federal income taxes when they earn poverty- or near-poverty level wages. A credit aimed at treating individual workers on par with families with children would make the system fairer and be a huge benefit to childless workers who are struggling to make ends meet.  It could even help children because it would encourage noncustodial fathers to enter or remain in the work force, which improves the odds that they make child support payments and remain connected with their kids.

In theory, a frequent wage supplement could make sense. Utilities and rent must be paid monthly, so there are advantages to a cash supplement that arrives at the same time as these recurring bills. Regular payments would also be more responsive to changes in earnings, just like the Supplemental Nutrition Assistance Program (SNAP – formerly Food Stamps) and other traditional anti-poverty programs. However, research shows that low-income families prefer to receive the EITC as a lump sum payment at the end of the year.

In addition, a monthly wage enhancement is a radical departure from current tax treatment, and Rubio’s specific plan is difficult to assess until he fills in gaps.  For instance, what would happen to a worker whose income changes during the year? Would Rubio’s plan provide supplements in some months and not others – even if annual wages ended up being quite high? SNAP and TANF benefits include an asset test, so that wealthy people with no earnings in a particular month don’t qualify. The EITC is also only available to households with little or no capital income.  Would employers have to administer these sorts of tests when calculating the wage enhancement? Would the wage enhancement be large enough and apply to a broad enough population that current EITC recipients wouldn’t lose out?

There is a middle-ground.  A plan such as this could be phased-in. To start, expand the childless EITC so it’s on par with its more generous counterpart for families with children. Senator Rubio could even restore the ability of families to receive advanced payments for the EITC, although he'd need to figure out a way to make them desirable to low-income families.

Through those relatively modest changes, Rubio wouldn’t risk destroying a program that has been truly effective at reducing poverty – yet he could improve the tax treatment of families without children and perhaps end poverty for more people.

It is important to note that replacing the EITC is just one piece of Rubio’s much more comprehensive plan.  The rest includes replacing many anti-poverty spending programs (he hasn’t said which) with a single block grant to states. That idea is enormously controversial. But his wage enhancement proposal could help advance an important conversation about the best way to supplement income for low-wage workers.

6Comments

  1. ND  ::  5:46 pm on January 28th, 2014:

    Is this really in the interest of these families, especially the children in these families?

    If we are going to pay men, do we want to pay men to be sole breadwinners or do we want to pay them to take care of their children, such as through paternity leave?

    Where does the funding come from for this?

    Why not acknowledge family structure that supports child development and get rid of income splitting, this EITC bias in favor of a “primary parent” (why not build the EITC around two caregivers), not make things worse by adding more sole breadwinnerism to the EITC.

  2. Michael Bindner  ::  4:33 pm on January 29th, 2014:

    Lack of education is a big cause of poverty (although there are many people currently in low wage jobs with high educations – I am one of them – working minimum wage at a cinema).

    The answer, of course, is to increase the minimum wage while also creating a plan for those with low educational attainment to be paid to go to school until full literate – and paid at the higher minimum wage. Families with children in either setting would get a much higher Child Tax Credit – say $1000 per child between federal and state sources – which would allow both the end of the EITC and the creation of a floor for Social Security payroll taxes. Of course, creating the floor would also require the equalization of the employer tax for Social Security – so that all qualified workers receive the same credit, regardless of base wage. I suspect that low wage workers would do much better under such an arrangement.

    The only question remains – how high the minimum wage? Such an increase is much more socially savory than to use some kind of tax credit or subsidy for employers, which essentially puts taxpayers in the position of subsidizing low wage employment (and the products that such employment buys – from chicken nuggetts to movie tickets).

  3. Michael Bindner  ::  4:36 pm on January 29th, 2014:

    Nothing says “I’m running for President” than issuing a tax reform plan.

  4. taxed enough  ::  4:54 pm on January 29th, 2014:

    Taxing money away from somebody who earned it and handing it to somebody who did not earn it is not a way to fight poverty. Rubio’s “Check-A-Month Club” will turn into yet another rip-off of those people who carry their own weight in society.

  5. AMTbuff  ::  6:24 pm on January 29th, 2014:

    It’s difficult to design a program which can pay money to people at low incomes without imposing very high effective marginal tax rates as people increase their incomes into the middle range. If the government is going to fix it so that people end up with nearly the same money working half time at minimum wage as they would working full time at $20 per hour, where’s the incentive to move up?

    If a program takes away most of the benefits of working harder, smarter, and longer, that program harms people rather than helping them. Helping people become self-sufficient should be the primary goal, not giving them a respectable lifestyle regardless of personal effort. If government really were omniscient we might be able to do better, but government is not God.

    P.S. Yes, I realize that the EITC phases in before it phases out. The phase-in range encourages both extra work and fraudulent over-reporting of Schedule C income. The phase-out range encourages the opposite. Softening the phase-out extends the benefit into middle incomes, inflating the cost of the program. There is no good solution to benefit phase-outs.

  6. WA ranks #42 in share of tax filers claiming Earned Income Tax Credit « Washington Research Council  ::  3:54 pm on January 31st, 2014:

    […] Bernstein writes that Mankiw presents a false choice. And on the right Sen. Marco Rubio wants to replace the EITC with a federal “monthly wage enhancement.” The Tax Policy Center thinks the idea may […]