Are the Costs of the EITC Worth It?
Less-educated men in the United States have had some tough years. Data from the US Bureau of Labor Statistics show that median wages and employment rates for less-educated men have dropped quite dramatically over the past several years. The causes are widely debated and lawmakers from both political parties are taking notice. In contrast to the 1990s when social policies for women (mostly unmarried) and children dominated the political sphere, efforts to help poor men are finally getting some attention.
One proposal that has gained some bipartisan support is an expansion of the earned income tax credit (EITC) for low-wage workers without resident children ("childless workers"). Currently, the EITC is most generous for families with resident children. A single parent with 2 children can receive a maximum refundable EITC that is 10 times what a single person with no resident children can receive. Of the $64 billion in federal EITC benefits in 2012, less than 3% goes to childless workers.
An expansion to the childless worker EITC is attractive for several reasons. It incentivizes work, lowers poverty, and avoids employment losses that have been linked to minimum wage increases. Supporters, including Rep. Paul Ryan and President Barack Obama, hope that an expanded EITC will shore up low wages for childless workers and lead to increased employment levels, higher marriage rates (because men will become more marriageable), and more child support collections.
But it comes at a cost. Based on current employment patterns, our estimates suggest that between $5 and $8 billion dollars will be needed to double the current maximum credit and increase income eligibility. More generous options that triple the current credit could cost between $9 billion and $22 billion, depending on the generosity of the income eligibility ceiling. These costs could be more if employment rates increase as a result of a more generous credit. Even though these costs are relatively small compared to the $600 billion spent on means-tested entitlement programs in the US, lawmakers should still carefully consider the expense.
One problem is the current rate of improper payments related to the EITC. A recent Government Accountability Office (GAO) report found that almost 27 percent of EITC expenditures (mostly related to the family EITC) are improper. The Supplemental Nutrition Assistance Program (SNAP), which provides food assistance benefits to low-income Americans, has a much lower error rate of only 3.2 percent. The GAO and others have identified the causes of the improper payments and recommended ways to address them, but to date little progress has been made.
Another consideration is targeting. On one hand, the EITC targets low-income households very well, in contrast to minimum wage increases that primarily go to non-poor households. According to the IRS, 100 percent of EITC benefits for childless workers went to households with less than $20,000 in adjusted gross income in tax year 2012. On the other hand, an expanded childless worker EITC will inevitably go to workers not part of the intended target group. Our estimates suggest that about 40 percent of an expansion would go to women, 6 percent to married couples, and just over 20 percent would go to people age 45 or older.
Another targeting problem relates to students and those who work a few weeks a year at high wages. Our estimates suggest that together almost 40 percent of an expansion could go to students or those who work less than half a year, which are not the intended target groups. Efforts to exclude these populations are possible, but would be administratively difficult and could lead to more improper payments.
Finally, there are some doubts that an expanded EITC for childless workers will achieve positive results. Professor Lawrence Mead of New York University argued in a 2014 National Affairs article that without work requirements similar to what was implemented during the welfare reforms of the late 1990s, any EITC expansion for childless workers will have little effect on improving employment rates. Others argue that the size of the credit, even if it is doubled or tripled, is still too low to result in any meaningful changes in employment.
It is rare in American politics that lawmakers from both sides of the aisle support a similar policy proposal, let alone one that costs billions of dollars. But before jumping on board, lawmakers should consider these issues and determine whether the trade-offs are worth the expense.