By: AIF Staff
On Friday, former Speaker Paul Ryan’s American Idea Foundation hosted a virtual policy panel on the future of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). The conversation featured a bipartisan group of experts for a timely and informative discussion about how legislators can make sure that our nation’s tax code is oriented toward expanding economic opportunities for those who need it most.
Spectrum News’ Anthony Dabruzzi covered the event and summarized its aims succinctly:
“Amid the pandemic, there has been lots of talk about tax credits, leaving many people wondering about what they really mean and how they can help Americans.
Former House Speaker Paul Ryan hopes two of those reforms can reduce poverty and grow the economy. He moderated a virtual conversation about the Earned Income and Child Tax credits on Friday. Ryan, who once led the House Ways and Means Committee, still has a lot of ideas about how to improve tax credits.
The American Idea Foundation hosted a bipartisan discussion to talk about ways to improve policies like the Earned Income Tax Credit (EITC), which helps low- to moderate-income workers and families get a tax break….
Regardless of a possible solution, the whole point of bouncing ideas around Friday was about finding ways to improve anti-poverty tools for policymakers.”
The wide-ranging conversation, featuring AEI’s Scott Winship and Katharine Stevens and Northwestern University’s Diane Schanzenbach, covered a lot of ground and some key excerpts follow.
Former Speaker Ryan frames the timeliness of this conversation coming out of the COVID-19 pandemic and in light of recent Congressional reforms:
“As we recover from this [COVID-19] pandemic, policymakers are facing a number of choices on ways to reduce poverty while continuing to encourage work. And, two of the most important poverty fighting tools the federal government has are the EITC and the CTC. These programs have long been key ways that the federal government both incentivizes work as well as reduces poverty.
Over the last several months, Congress has enacted changes to these programs. For example, the CTC received a large increase and was made refundable in the most recent COVID-19 relief bill. And numerous proposals have been made recently to either expand the EITC or CTC, as well as to create brand new programs, such as a child allowance….
These issues are front and center in a way that they rarely are, which is why I’m so looking forward to discussing the possibilities of improving the EITC and CTC, and taking a look at tradeoffs as we look towards reforming our social benefit programs.”
Northwestern University’s Diane Schanzenbach on how these credits impact families and children and how to address a gap during economic downturns:
“I want to start off by reaffirming that the Earned Income Tax Credit and Child Tax Credit are the cornerstones of our anti-poverty policies for families with kids. They boost the incomes of 28 million Americans, many of whom are low-income, and they lift 10.5 million people out of poverty, including 5.5 million children out of poverty. It truly is our most effective anti-poverty policy for families with kids….
There is strong evidence that the benefits conveyed by the EITC have lasting impacts on kids. There is better infant health, better school performance, higher college enrollment, and higher earnings in young adulthood. This is an investment that pays off over a lifetime for kids.
On the employment effects, this is joint work with Michael Strain of the American Enterprise Institute, it’s not surprising that the EITC improves employment. The EITC includes strong incentives for non-workers to get jobs. For example, with the EITC, for every $1 that you earn, we say: If you’re going to earn that $1, we’re going to give you an extra $.40 right. This is sort of Economics 101 so we shouldn’t be surprised that it works.
So, what we did was look at employment and how employment responded after the five major expansions in Earned Income Tax Credit…. Now, the EITC is primarily targeted at unmarried mothers who are going to earn low wages and so we studied those people in particular and across three decades, the EITC expansions led to increases in employment. People got jobs and these were large 3%, 7% or even 10% point increases, so it’s worth it.
It shouldn’t surprise us that subsidizing something like employment means we have more but this truly is a program that works. It works at its best when the economy is thriving, so unfortunately the EITC does not pay off, of course, when workers lose their jobs. And over time, we’ve shifted a lot our safety net spending to promote and encourage work and there’s great merit in that, but what it has done is left us exposed without enough insurance when the economy turns down just because there is just not enough of safety net.”
Scott Winship from the American Enterprise Institute on the debate over these credits among conservatives and the trade-offs involved between workforce participation and family formation:
“I don’t think there’s necessarily tension in the sense that originally the Child Tax Credit was targeted as a way to both reward work and to make the costs of raising families easier and as an anti-poverty tool for low-income workers who did work.
Under the current CTC before the recent temporary expansion, there is a phase-in area for lower-income workers. It is the same as with the EITC where it clearly pays to work more and where you get a bigger Child Tax Credit from additional income and additional hours. And the benefits of the CTC, most of them do actually go to non-poor workers. It extends up the income scale a ways and phases out at a fairly high-income scale into families that make over six figures can still generally get some Child Tax Credits. And so, you know, in that sense I think it’s fairly well-designed to both support work and to support family formation and reduce poverty.
I think the more recent debates really do divide the center-right between those who are most concerned about family formation and declining fertility and those who are more concerned about anti-poverty efforts and not taking steps backwards where we might be able to reduce child-poverty in the short term by giving non-working parents a more generous child allowance, whereas the current Child Tax Credit generally requires at least some work.
That crowd is very concerned about expanding benefits for non-workers versus I think where Senator Romney comes at this — and where a lot of social conservatives come at this, which is that they would like there to be more children and they think that it’s become too expensive to raise a family. I think that declining fertility is just something that we see across the world. As countries get richer, they shift. If you look at a trend and what happened in the 1970’s, the same decade when professional opportunities for women opened up, and I just think there is no going back to that sort of pre-1970’s world. So, I do think policies like the Child Tax Credit and reforms to it can encourage more family formation and more children on the margin, but we’re talking about pushing against some pretty big societal forces that are going to keep us from getting back to a baseline where everybody has 3 or 4 more kids.”
Katharine Stevens on reforming the Child Tax Credit so it could be a “borrowable benefit” targeted to when parents and child need it most:
“Matt Weidinger at AEI and I recently published paper proposing that parents be allowed to borrow from future child tax credits. So, assuming it’s an actual credit and assuming the parent has sufficient work earnings over the life of a child, it totals $34,000 over the life of the child.
Our thought was that [the credit] kind of dribbles out over these years where by the time the child is 16, you’re earning more money, your child is not in childcare and you may not even notice the credit. So, what we propose was allowing parents to borrow up to $30,000 from their lifetime of their Child Tax Credit in the first five years of the child’s life.
So, it could be all in the first two years, so they could have $15,000 in year one plus $15,000 in year two. Added to that is the $2,000 Child Tax Credit that you were getting those years anyways, so it is $17,000. $17,000 is actually enough for a two-earner family to allow one earner to step out of the workplace for a year or for two years.
Our idea was that these dollars given upfront in the child’s life, when the development is most important, gives parents a lot more choice in how and who is going to be raising their kids.
Another alternative would be if a single woman was working full-time, she could use it for higher-quality childcare. This is a problem I see with poor families: You’re working, but child development doesn’t depend exactly on your work. it doesn’t depend on your money either. It depends on the environment that your child is developing in and so, it’s very painful for many poor parents to know that their infant or their toddler isn’t in an environment that is good for their baby. So, the idea on the lower-end of the income scale is that it would empower women, empower families to make sure that their child, whether at home with a parent or at a high-quality childcare situation, is able to be put somewhere that is good for that kid.”
Diane Schanzenbach on how a strong safety net and tax policies can supplement the efforts of community organizations to better fight poverty:
“I agree with you broadly that a lot of these community organizations that can walk beside people and do the hard work of getting the job or getting the job training can really do a lot of good. They can do more good when they don’t also have to meet the basic needs of people. So, for example, you’ll see here that at the Greater Chicago Food Depository, we have got a fantastic job-training program. We can be really creative and meet their needs and help solve the underlying causes of poverty, but not when there is a line one-mile long outside of the food bank.
So, we do need income support and that’s why a thriving safety net is important, so that others who are better equipped for the one-on-one, “let’s walk through this together and sort of get you on track” efforts can do their jobs more effectively.”
Katharine Stevens on how potential reforms would impact distinct populations like childless adults and working parents:
“Let’s start with childless adults. We know that the EITC has been fantastically successful especially for those working-moms, but it has historically been smaller for childless adults. And as we’ve seen rates of employment drop for those populations, I think it makes a lot of sense that if we want those people to come back [to the workforce], perhaps we should start subsidizing that more.
“I think the Romney people made a good point when they put out their version of the child allowance proposal. They said: Why do we separate the EITC from subsidizing work just for people with children? Why don’t we subsidize work just period for [all] workers and then think about a different mechanism for children? And there’s a lot of merit to that. But I didn’t love how they did it because there were sort-of going to pull the rug out from under too many single moms and I think that would lead to worse work incentives but in any case, I do think that if we’re worried about single men and their employment rates or single women and childless women and their employment rates then in this era, then subsidizing them makes a lot of sense.”
Diane Schanzenbach and Scott Winship on the EITC’s effect on rates of marriage and whether it creates disincentives to marry:
Schanzenbach: “It’s a great question. The studies agree with you and find that the EITC makes women less likely to marry, but it’s a pretty small effect. The simulations seem to say that if she gets married, she would lose about half of her expected EITC benefit. Certainly, we could do more to reduce the marriage penalty of the EITC. The model that we use in economics to think about marriages is that if women are earning more, they’re less likely to choose to get married because they are in less need of a partner. And so, this is just the one of those things that are hard to break.”
Winship: “I think there are a few basic ways that you can reform the EITC to promote marriage more. The biggest reform would be to make the EITC tied to individual earnings rather than to the amount of earnings or income on the tax form, as that way you get the same benefit whether you are single or married. Another way is to sort of expand the plateau and phase-out regions of the EITC so that you can get the maximum amount even with higher income and you can get something, at least, even at higher incomes versus what you get now. And then the third way, which would be more radical, would be to explicitly increase the generosity methods for married couples or reduce them for single-earners. I’ve proposed something before [like this] that remarkably, didn’t catch on. It was to increase the generosity of the EITC but just for married couples. It would promote marriage and it wouldn’t actually hurt single-parent workers, but it seemed to be a bridge too far.”
Former Speaker Paul Ryan on Democrats recent tax proposals to pay for an infrastructure proposal:
“I think they made a huge mistake on this one. I think the Biden Administration and [Senator] Ron [Wyden], who is a friend of mine, is going in the wrong direction on this one. I think he’s going exactly backwards. We were the worst corporate tax system in the world. We were number one with the highest corporate rates. We fixed that with the Tax Cuts and Jobs Act and went to a territorial tax system, which stopped inversions.
As a result of that reform, we had impressive wage-growth, especially among the bottom two quintiles of earners. So, we had great wage growth, productivity increases, living standard increases and then obviously, we had a pandemic but the worst thing you could do right now is launch America into this uncompetitive area yet again. This bill will make us, again, the worst business tax system in the world.
We would go to worst from the middle of the pack. We would go from very competitive back to worse again with this. Most importantly, it is not going to work. You’re going to create more inversions of these American companies where they are going to leave American again if this were to pass…
[Democrats] are acknowledging that they’re making American businesses less competitive. We’re going to encourage them to go overseas and we’re going to ask all the rest of the world to do this to their own companies.
It’s this whole theory of tax harmonization versus tax competition. The jury is in: The current competition works, harmonization doesn’t.
The last point I’ll make, as I want to get back on topic here, is that if you want to design a perfect system to not compete well against China, this is it. This is conceding to China, big time..
They made infrastructure, which is really kind of a bipartisan issue, partisan by seemingly undoing the great success and progress that was done on getting our tax system in a competitive environment with the rest of the world…. I think they missed the boat on this and it’s now two times that they have walked away from what could have been a bipartisan success.”
This panel conversation was the latest hosted by the American Idea Foundation, following informative dialogues on criminal justice reform and Opportunity Zones. Consistent with its mission, the American Idea Foundation believes that policymakers should look for solutions that empower individuals and communities to reach their full potential and though Speaker Ryan’s leadership on the Tax Cuts and Jobs Act improved the tax system for the first time in a generation, this conversation made clear that there is still more work to be done.