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Expand the Best Program to Fight Poverty

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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One problem with smart economic policy is that few people are willing to go out in the street and protest in favor of the optimal solution. Folks will march for a $15 minimum wage. They’ll join campaigns like Fight for $15, and donate their hard-earned money to the cause. They’ll engage their skeptical friends in fiery debates on Facebook and Twitter.

But you never see people out there fighting for an increase in the earned-income tax credit, do you? This wonky policy, the brainchild of technocrats and academic economists, has been fighting poverty in the U.S since 1975. Most economists would probably agree that it’s one of the most effective, if not the most effective, poverty-fighting tool around. It’s also a big, important part of the U.S. social safety net, passing out almost $70 billion a year in benefits to poor and working-class Americans. But its confusing four-letter acronym, its complicated structure and its lack of clear partisan appeal mean that it gets overlooked in favor of flashier ideas.

Here’s a graph showing how the policy works:

Giving Credit Where It's Due
The earned income tax credit rises with income, then phases out*
 
Source: Center on Budget and Policy Priorities
*For a couple with one child.

If your family makes only a very small amount of money, the EITC acts like a negative income tax -- the more you make, the more the government pays you. So for very poor people, EITC is like a wage subsidy, putting money in people’s pockets while also encouraging them to work.

At moderately low levels of income, EITC switches to a basic income -- a set number of dollars a year. Then, as income rises past a certain level, it begins to phase out. The loss of benefits as income increases to middle-class levels is a slight incentive for lower-middle-class people to work less (a common feature of almost all welfare policies).

So EITC is like a combination of negative income tax (or wage subsidy) with basic income. It puts more money in the pockets of the poor and working class, and it encourages people with no jobs to get into the workforce.

That one-two punch against poverty makes the EITC a great policy. Research consistently finds that the program reduces the ranks of the impoverished. A recent study, by economists Hilary Hoynes and Ankur Patel, gives us some numbers:

Our results show that a…$1,000 increase in the EITC leads to a 5.6 to 7.8 percentage point increase in employment and a 5.4 to 9.4 percentage point reduction in the share of families in poverty…

Unlike many studies, which only measure the amount of money that Americans receive through the EITC, Hoynes and Patel estimate the amount of extra income that people earn as a result of the work incentive. They find that this makes the monetary benefit of the policy about half again as large as most studies report. (The only downside of the policy, the authors find, is that it doesn’t do much for the very poorest Americans. Because the policy acts like a negative income tax, poor people who don't work don’t benefit much.)

These numbers are pretty huge, as poverty-fighting programs go. They suggest that a moderate increase in the EITC, costing a few tens of billions of dollars a year, could cut official U.S. poverty rates in half. That’s less than 0.5 percent of gross domestic product, in exchange for an enormous decrease in human deprivation and suffering.

In comparison, recent studies of Seattle’s minimum wage hike found that the effect on the incomes of the poorest workers was only a few cents per hour. That doesn’t mean that the EITC is an alternative to the minimum wage -- you can obviously have both. But it raises the question of why the American left spends so much of its energy, time and political capital fighting for minimum wage hikes, while mostly ignoring a proven policy-beater like the EITC. Perhaps it just needs a catchier name?

Whatever the reason, poor people in the U.S. would be greatly helped if progressive leaders made the EITC a centerpiece of their reform crusade. This isn’t some technocratic tweak. It isn’t tokenism or trickle-down policy. It’s already a crucial piece of the way that poor Americans make ends meet. The EITC is how millions buy food for their kids and keep a roof over their heads.

My little dream is that sometime soon, progressives will be out in the street marching for increases in the EITC. An easy step would be to increase the maximum EITC payment by about 50 percent. For a two-income family with one qualified child, that would take the yearly benefit from $3,359 to about $5,000. “Fight for $5,000” -- it has a nice ring, don’t you think?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net