Poverty Policy Ideas, Beefed Up

Rebecca Vallas, Melissa Boteach, and Rachel West have a report over at CAP titled "Harnessing the EITC and Other Tax Credits to Promote Financial Stability and Economic Mobility." I don't wish to quibble with the report per se, but I thought it would be interesting to ponder how it could be beefed up.

The Report

There are a lot of proposals in the report and I don't intend to cover them all. But here are the big ones.

First, increase the Earned Income Tax Credit for childless workers, lower the minimum age for claiming the EITC from 25 to 18, institute an Early Refund program whereby people could claim part of the EITC benefit they accrued in the first half of the year, and institute categorical Pell Grant eligibility for anyone receiving the EITC.

Second, make the Child Tax Credit fully refundable (or at least make permanent temporary provisions that have extended eligibility for the semi-refundable Additional Child Tax Credit to lower-income families).

Third, make the Saver's Credit (an obscure means-tested tax credit that provides modest government matching for amounts low-income people contribute to an IRA or 401k) fully refundable and smooth the phaseout rates. Relatedly, eliminate asset tests for certain benefit programs that make it difficult for low-income people to save.

Different Ways

In addition to eliminating asset tests for benefit programs, here's what I would do.

First, transform the Earned Income Tax Credit into a program that mirrors the Working Tax Credit that the UK has. Under this policy, those with eligible incomes are able to apply for benefits that provide them wage boosts that are essentially similar to those you get under the EITC. The difference is that these wage boosts are paid out monthly instead of in a lump sum at the end of the year. If you have a sudden increase in income that would change the amount of the benefits, you must report this, at which point your benefits are reduced. In that case, you do not have to pay anything back even if your annual income ends up way higher (which differs from the Advance EITC disaster of a few years ago). Finally, this Working Tax Credit would not be tied to the number of children you have, unlike the EITC.

Second, eliminate the Child Tax Credit, the Dependent Exemption, the Head of Household filing status, and the Child and Dependent Care Tax Credit. These tax expenditures totaled $103.19 billion last year. Use the savings plus an additional $160 billion to fund a child allowance that is equal to $300 per month per child. The net additional cost of this program is just 1% of GDP. It would cut official child poverty by 42% and Supplemental Child Poverty by 51%. Such a program is common throughout the developed world and the $300/month benefit amount is roughly equivalent to the $3,500 Child Tax Credit proposal a small number of conservatives have been pushing recently.

Third, create publicly-run defined-contribution pension savings vehicles. The Obama administration sort of did something like this earlier in the year with myRA, but it's very limited. We should make a fully functional public option that can provide 401k and IRA services. This might seem like a bold proposition, but recall that the Federal Government already operates a defined-contribution pension fund for its employees that presently manages $400 billion of assets. It does so very successfully as well, with administrative fees running around 0.03%.

To the extent that you want to encourage savings with matchings and related things, it would be possible to provide means-tested matching at the end of the year come tax time (since the federal government would both receive your tax filings and manage the retirement account). You could also give people the option to put Working Tax Credit payments into the account and provide a variety of other subsidies to the accounts that replace the ridiculous tax subsidies we currently use to encourage savings that almost entirely go to the rich. Finally, you could make contributions automatic through payroll deductions, provided you give people the choice to opt out.

So there you have it. Replace the EITC with a Working Tax Credit. Replace the CTC and related child tax expenditures with a robut child allowance. Replace the Saver's Credit and other related savings tax subsidies with a more equitable matching scheme that operates within a publicly-run defined-contribution pension savings vehicle.