Tuesday, October 16, 2007

EITC, part 1 gazillion

I am a big proponent of the Earned Income Tax Credit. I have written on it here ad nauseum and think it is the single best anti-poverty tool the federal government wields. That said, I find it mind numbingly dumb that we apply stringent asset tests to recipients.

The Earned Income Tax Credit is a wage subsidy, thus you have to work to get it. However, if you have accumulated savings (generally above $1000), depending on your state, you are not eligible for it. Likewise, if you accumulate savings above a certain amount while you are receiving the EITC you will no longer be eligible. This measure is in place for two reasons. 1) to discourage tax fraud, 2) to keep from subsidizing upper middle class liberal arts white kids like me. Both of these fears are real if small. The fraud issue isn't all that big because we aren't really getting much in the way of tax receipts from this subset of the population anyhow. The second issue is also a realistic fear in the sense that you would be incetivizing some college educated types to loaf around but I doubt such a phenomenon would occur in a significant manner. The asset test to me seems foolish as you undermine the basic notion of the earned income test, to help people better their circumstances through work. If someone manages to accumulate assets of $1000 on a subsidized wage of $14/hr, well, bully for them, they have shown some real thrift. This doesn't seem to suggest we should penalize them. Instead we should hope that with time, this support will no longer be necessary as they have increased their earning potential through the acquisition of skills and hopefully built up something for a rainy day.

The other improvement I would like to see is an improvement in the incentive structure of the EITC. The EITC's other basic defect is that is rebated at the end of the year in a lump sum just like a tax return. This undermines the incentive structure as there is no visible link between the work put in and the amount of assistance received. I would think if we can withhold taxes on each pay check and administer all types of public assistance plans on a recurrent basis, that we could cut somebody a EITC check on pay day. However, if this were to prove too cumbersome I would think at the very least we can show on a person's paycheck how much they will be receiving at the end of the year so they can make the linkage of their work and the amount of an EITC accrued in real time and actually plan on how they would use it.

In the end, you are trying to demonstrate that work pays, or in other words, that it is preferable to not working.

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