Tag: Reducing Income Inequality

The Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) was enacted by President Gerald Ford’s administration in 1975.   The Tax Policy Center explains that it is a federal tax credit that “equals a fixed percentage of earnings from the first dollar of earnings until the credit reaches its maximum.  The maximum credit is paid until earnings reach a specified level, after which it declines with each additional dollar of income until no credit is available.”   The federal EITC is fully refundable.  This means that if the credit exceeds the family’s tax liability, the family still receives the full credit in the form of a tax refund.  The EITC is only awarded if you have an income.  What’s more is that the EITC’s credit grows with each additional dollar of income, this creates an incentive for people to increase their income either by increasing their hours, leaving welfare and looking for work, and looking for higher paying jobs.  The Center on Budget and Policy Priorities (CBPP) explain the eligibility requirements.  For filing taxes for the 2015 calendar year, “working families with children that have annual incomes below about $39,000 to $53,300 (depending on marital status and the number of dependent children) may be eligible for the federal EITC.”  To be eligible for the EITC if you do not have children, you have to be in the ages of 25-64 and also have an income below about $14,800 ($20,300 for a married couple). You can receive a small EITC.  In 2013, over 27 million working families and individuals received the EITC.  97% of benefits from the EITC go to families with children.  According to the Tax Policy Center, almost all benefits of this tax credit go to families in the bottom three quintiles of income distribution.  The U.S. Census Bureau found that the EITC lifted 6.2 million people out of poverty in 2013.  This included 3.2 million children.

How does it work?  The phase in rate is the money where you earn a portion of your income to increase the value of the EITC.  So let’s say the phase-in rate for a married couple with one child is 34%, for every dollar that is earned by the couple, the EITC is increased by 34 cents until you reach the income threshold where the phase-in ends and the EITC holds steady. It includes every dollar that you earn.  The phase-in for a married couple with one child ends at $9,880 so at that point, your EITC would be $3,359.  If you make between $9,880 and $23,630, your EITC would be $3,359.  Then you slowly lose that money from your EITC depending on how much you earn until it is reduced by zero.  The phaseout rate is 15.98% for a married couple with one child.  All of these numbers were based in 2015.   If your EITC is larger than your tax liability, you receive it back from the federal government in a refund.  In 2013, the average EITC was $3074 for a family with children compared to $281 for a family without children.  That $3074 is equivalent to boosting wages by $256/month.

More benefits of the EITC

The EITC and relative expansions of it have had tremendous effects on unemployment and reducing welfare and other cash assistance programs.  Because the EITC essentially requires you to work to be able to claim the credit, it encourages people to transition from welfare to work.   In Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare, the authors V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz found that the EITC had a “substantial, positive effect on the employment of families who have uses or will use welfare.”  In a paper by Jeffrey Grogger, titled Welfare Transitions in the 1990s: The Economy, Welfare Policy, and the EITC, he finds that the EITC had the most signficant effects in reducing welfare caseloads during the 1990s.  He writes the EITC expansions “reduced welfare participation by 6.5%,relative to its 1993 peak.  Thus they accounted for over 10% of the 1993-1999 decline.”  Hotz, Mullin, and Scholz write that “for those out of the labor market, the EITC provides an unambiguous, positive incentive to work.”  Similarly, they found EITC expansion “accounted for 11.8% of the average increase in employment” over 1991 – 2000.

By far, the biggest recipients of the EITC are single mothers.  They are the ones most likely to qualify because of their low income earnings and qualifying children.  From March of 1990 and March of 2000, Hotz, Mullin, and Scholz wrote that employment rates of single mothers rose to 73.9% from 55.2%.  Not all of this can be attributed to the expansions of the EITC but as we’ve seen the increase encourages people to work.  The CBPP analysis shows

Economic studies controlling for other policy and economic changes during this period also found that the most significant gains in employment attributable to the EITC occurred among mothers with young children and mothers with low education…

Other research has found that EITC expansions between 1984 and 1996 accounted for more than half of the large increase in employment among single mothers during that period…

The EITC expansions of the 1990s “appear to be the most important single factor in explaining why female family heads increased their employment over 1993-1999,” University of Chicago economist Jeffrey Grogger has concluded.

The recession in recent years has hurt a number of workers and decreased wages.  The National Employment Law Project found in their analysis that “mid-wage jobs made up  60% of the jobs lost during the recession, they made up only 22% of the job gained during the recovery…lower-wage jobs, in contrast, represented 21% of the jobs lost during the recession but 58% of jobs gained during the recovery.”  The money refunded through the EITC help low-wage workers meet temporary needs, able to afford college, or pay other bills.  When I received my portion of the EITC, I used a majority of my money to afford daycare for my daughter for a substantial part of the year. The majority of those who receive the EITC only do so for a year or two at a time.  61% of those who received the EITC between 1989 and 2006 did so for only a year or two at a time.

Childless workers, the minimum wage, and strengthening the EITC

In order to help reduce income inequality, we need to strengthen the EITC.  Conservative economists including economic adviser to Donald Trump, Stephen Moore support raising the earned income tax credit.  Beyond that, conservative think tanks the American Enterprise Institute and American Action Forum also support strengthening the EITC.  The difference is that they support strengthening the EITC in a vacuum instead of tying it to strengthening the minimum wage, as well.  The CBPP argues that both the minimum wage and the EITC should be strengthened because “they function best when both are strong because each helps fill gaps that the other can’t fully address on its own, and neither is sufficient by itself.”

The current phase in for the maximum amount for the EITC for a single filer is $6,580 with a the phase out beginning at $8,240.  With the current federal minimum wage at $7.25/hour that is roughly the equivalent of 17-21 hours per week to earn the maximum amount of the EITC.  The maximum amount from the federal EITC is $503.  The EITC return begins to decline at that point.  A single filer who works full-time in a minimum wage position would earn $15,080/year and would not qualify for the EITC.  The maximum amount of hours to qualify for any portion of the EITC is $14,819 which would be just over 39 hours per week.  The credit’s value would be $1.  That hourly estimate is based off the federal minimum wage instead of any increases in the minimum wage at the state level.

This may not seem like a giant deal, although, we do have data on who earns the minimum wage or close to it so to see how many people this might affect.  The Congressional Budget Office (CBO) found that only 26.1% of low-wage earners are parents.  The Department of Labor found that 50.6% of those who are earning $7.25/hour or less are aged 16-24.  The Economic Policy Institute (EPI) found that 36.5% of workers earning $11.10 per hour or less were aged 20-29 while 73.7% of all those earning $11.10 per hour or less were aged 20-54.  The guidelines for childless single adults are that you have to be 25 or older and you have to work essentially 17-21 hours per week at $7.25/hour.  EPI found that 14.2% of workers who earn $11.50 or less work fewer than 20 hours/week.  Also, according to them, 54% work full time, meaning 35 or more hours per week.  A minimum wage increase without an accompanying increase in the EITC would harm workers and reduce their potential income.

While we are at the point where we should be strengthening the EITC.  The easiest solution is to adjust the ages that people are eligible to receive the EITC if they are childless. The typical response has been to expand the age requirements to 21 instead of 25 and expand it from 65 to 67.  My fear with expanding it that much is just that there is still a gap of those who are covered.  I would rather have it expanded to those at 18 (which we have generally decided is the age to become an adult) all the way up to 70.  But we must also go further, increasing phase in ending income threshold and increasing when the phase out income threshold begins would also wonders to help reducing poverty.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid family leave

One of the ways that we can reduce income inequality would be to provide for paid family and medical leave. The Family and Medical Leave Act (FMLA) which was passed in 1993 provides up to 12 weeks of leave.  This law only applies to companies with more than 50 employees and doesn’t actually give employees a chance to recover their wages.  Moreover, only about 60% of workers are covered by FMLA establishments.   It is up to the employers if they will provide paid leave to their employees.  According to the Department of Labor, published in 2013, in the employee benefits survey only 12% of workers have access to paid family leave.

A national paid leave law would provide employees to earn a portion of their pay while they take time to address a serious health condition, care for a family member with a serious health condition, and care for a newborn, newly adopted child or newly-placed foster child. According to National Partnership for Women and Families, a serious health condition is one that requires either inpatient care or continuing treatment by a health care provider.  Continuing with National Partnership for Women and Families, usually payment for these types of programs are either by join employer-employee contributions or solely by employee contributions and the funds are paid to a special insurance system where funds are disbursed. As Cohn notes in The New Republic, the paid family leave is typically set up in a similar fashion to unemployment or disability insurance where the money is taken out via a payroll tax and is then withdrawn when you need it.

California passed a paid family leave law in 2004.  The law is similar to other government social insurance funds, such as disability or unemployment and would provide up to six weeks of paid leave at up to 55% of an employee’s earnings.  While it is a good program, I did not take advantage of it while I was in California as even 55% of my wages while I was there when my daughter was born would not have been enough to support my family.  In a survey conducted by the Center for Economic Policy and Research, 89% of businesses said they felt the law either had a positive or no noticeable effect.  Further, they found that 87% of employers reported that the state’s paid family leave program resulted in no cost increases.  The researchers wrote “fears expressed by opponents of the program that PFL would create a heavy burden on the state’s employers even report reduction in costs and improvements in productivity or profitability.”  In a report from the White House Counsel of Economic Advisers, they found that 90% of California employers reported no noticeable or a positive effect on on profitability, turnover, and morale.

Jonathan Cohn writes in The New Republic that businesses actually like to offer paid family leave and it makes more sense to begin to offer it contrary to what some conservative politicians argue.   Google announced that it was extending paid leave for its employees by several weeks.  The White House Counsel of Economic Advisers in their report on paid leave found that 2/3 of human resource managers called family-supportive policies including flexible schedules as the single most important factor in attracting and retaining employees.  And in that same report 90% of respondent employers characterized their family-friendly policies as cost-effective.  In a report written by Linda Houser and Thomas Vartanian titled Pay Matters: The Positive Economic Impacts of Paid Family Leave for Families, Businesses and the Public they studied the economic impacts of paid leave compared to the effects of unpaid leave or no leave.  Houser and Vartanian had a number of interesting findings in their paper.  Women who report taking paid leave are more likely to be working 9 to 12 months after a child’s birth than are those who report taking no leave at all.

The reason that it makes more business sense is that, as Houser and Vartanian find, employees have stronger labor force attachment after returning from leave.  Betsey Stevenson, a member of the president’s Council of Economic Advisers, suggested “women who are offered maternity leave are more likely to return to the same firm, and many women who would not have otherwise returned to work re-enter the labor force within a year.”  As Cohn notes, numerous studies have shown that offering paid leave tends to improve retention.  This is very important, in the same report from the White House Council of Economic advisers found that the median cost of replacing an employee was 21% of that employee’s annual salary.  What’s more is that an employee absenteeism due to work-family responsibilities cost employers about $500 – $2,000 per employee per year.

The reason that there is a need to be able to provide this as a government benefit instead of relying on the private sector is that corporations are not reacting quick enough and those that would benefit the most from these policies are not offered.  As we see with the statistics from the Department of Labor, overwhelmingly, the poorest do not have access to paid family leave:

Characteristics Family leave  
  Paid Unpaid
Worker characteristics    
Management, professional, and related 20 92
    Management, business, and financial 25 92
    Professional and related 17 92
Service 7 80
    Protective service 14 90
Natural resources, construction, and maintenance 8 81
    Construction, extraction, farming, fishing, and 7 80
     forestry    
    Installation, maintenance, and repair 9 83
Production, transportation, and material moving 7 86
    Production 8 88
    Transportation and material moving 6 84
Full time 15 90
Part time 5 77
Average wage within the following categories3:    
    Lowest 25 percent 5 78
        Lowest 10 percent 4 75
    Second 25 percent 11 87
    Third 25 percent 15 91
    Highest 25 percent 21 93
        Highest 10 percent 22 94

It makes financial sense for employees to support paid family leave. Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth writes that women lose an estimated $274,044 and men $233,716 in lifetime wages and social security benefits when they have to leave the labor force early due to care giving responsibilities. Women in the workforce have not changed in a significant manner since the mid 1990s.  In their paper Female Labor Supply: Why is the US Falling Behind, Francine D. Blau and Lawrence M. Kahn write “by giving workers the right to thei job back after taking the leave, [paid leave] raises the job prospects of those who have left the labor force after the birth of a child.”  Houser and Vartanian found in their paper that women who report leaves of 30 or more days are 54% more likely to report wage increases in the year following the child’s birth than are women who take no leave at all.  Perhaps the idea that those returning from leave have a labor force attachment have some merit.  By shifting the burden to provide this leave away from businesses and place it squarely with the government, there will be new opportunities for small businesses who cannot afford to currently provide paid family leave.  Smaller businesses would not have to compete with larger firms for the same talent pool and be able to offer more competitive offers.  As we have seen, human resource managers believe that family supportive policies are what can attract and retain employees.

Finally, it makes sense for the government to encourage it.  While there will be a small uptick in government spending in “entitlement” spending due to how the Paid Leave Insurance would be distributed, there would likely be a cost savings as those who take leaves will likely see a decrease in other government spending.  Houser and Vartanian found that those who received paid family leave were much less likely to have to rely on public assistance.   Specifically they found

Women who return to work after a paid leave have a 39% lower likelihood of receiving public assistance and a 40% lower likelihood of food stamp receipt in the year following the child’s birth, when compared to those who return to work and take no leave at all.  Men who return to work after a paid family leave have a significantly lower likelihood of receiving public assistance and food stamps in the year following the child’s birth, when compared to those who return to work and take no family leave at all.

This should be self-evident by relying on the paid family leave, they were able to stay afloat without having to deal with additional public assistance.

Where it stands now

Hillary Clinton, Bernie Sanders, and Martin O’Malley all announced their support for paid family leave laws.  Clinton previously supported a similar law in her 2008 run for the Democratic nomination.  Cohn believes that Clinton would support such a law if she became president and would lay it out as a central tenant in her governing agenda.  The most ambitious form of paid leave among federal legislators is The Family and Medical Insurance Leave Act (The FAMILY Act) which has been introduced by Kirsten Gillibrand and Rosa DeLauro.  Their law would allow workers up to 12 weeks of up to 66%  of their monthly wages up to a capped amount for a serious health condition; the serious health condition of their child, parent, spouse or domestic partner; and the birth or adoption of a child.  It would cover all workers in all companies and would be funded by payroll contributions which they described as two-tenths of one percent by each the employer and employee.  It would also create a new Office of Paid Family and Medical Leave within the Social Security Administration.  Clinton’s plan would cost about $1 billion in annual spending.  This bill would cost more.  While she hasn’t endorsed this plan, she has said she supports the principle.

Marco Rubio in his failed bid to win the Republican presidential nomination offered a plan to pay for family leave which was based on a tax credit.  Rubio argued against a federal mandate comparing the paid family and medical leave to Obamacare.  Rubio argued for a tax credit to help pay for it.  The tax credit would be a “25% non-refundable tax credit for businesses that voluntarily offer at least four weeks of paid family leave, limited  to twelve weeks of leave and $4,000 per employee each year.”  In other words, as Jonathan Cohn writes, “for every four dollars in wages that companies paid out to employees on leave, they would get just one dollar back from the government.”    Since the $4,000 is the maximum tax credit, a company would need to pay $16,000 to get the maximum credit.  As Cohn reports other policy analysts as saying that the tax credit is just too small for companies to take advantage of the policies.  The Tax Policy Center issued a report on tax breaks similar to this such as hiring people on welfare and people with disabilities, and found that   While I should refrain from commenting on someone’s failures when they were trying to run for President, Rubio’s plan was modeled after the Republican plan put forth by Deb Fischer and Angus King. It is surprising that Rubio even mentioned this type of plan while other more conventional candidates running for President such as Jeb Bush argued against paid family leave.

I think it’s more likely that Gillibrand’s plan with the FAMILY Act is the better plan; I think that Rubio’s plan is more likely to pass.  My assumption is that there will be a compromise to increase the tax credit for employers to be able to take advantage of offering such a package.  While I do believe that paid family leave would be difficult to be able to pass through an increasingly hyperpartisan Congress, I think that it’s worth seeing where everyone’s support lies.  My support lies with Gillibrand and her plan.  I think it’s a better plan because I believe that it covers more workers and is more likely to be followed through with.  Rubio’s plan, I believe, will be hailed as a plan that will solve the issue while doing nothing.  Nevertheless, paid family leave is an important idea and one that deserves our support.   I believe that I have laid out the arguments in favor of such a plan.