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The EITC Alternative

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ColeTrain
By ColeTrain | Nov 4 2015 2:27 AM
Since this has facilitated no discussion on DDO, I'll post it here as well. :)

Introduction:

The EITC (Earned Income Tax Credit) has been oft appraised as a more appropriate solution to mitigating poverty than raising the minimum wage. According to the Center on Budget and Policy Priorities, the EITC is "a federal tax credit for low and moderate income working people." [1] Essentially, this program provides a monetary reward for working families whose wages are too low to effectively support themselves. As of now, over half of the US (26 states, plus DC) have implemented the EITC in their own form. As a simple definition of how it operates, the Internal Revenue simplifies, "[the] EITC reduces the amount of tax you owe and may give you a refund." [2] In practice, this would be a definite benefit to low to moderate income workers who are having considerable difficulty supporting themselves and their family.

Benefits:

In the recent past (2013), the EITC has been demonstrably successful.
[ http://www.cbpp.org...]

In 2012 alone, the program is accredited to keeping 6.5 million (3.3 million children) out of poverty. [3] To date, it is the *most* successful tax program in preventing poverty (for children), and is only trumped by Social Security (which is actually different, as it doesn't require that the recipients work, and has a juxtaposed application). For its specific target, it has been widely popular and largely successful. Empirical research on the topic suggests there is "sizable and robust increases in employment." [3] [4]

Common appraisals for the EITC stem from the view that it will fiscally stimulate the state and incentivize working to people previously relying singularly on welfare (causing them to [7], or individuals with no inherent previous desire to climb the corporate ladder. The majority of candidates (GOP and Democrats alike) for the 2016 presidential election support an increase of either the EITC or similar programs. [5] In it is no hard task to recognize the current US tax code is in desperate need of substantial change.

Encouraging Work
There is overwhelming consensus the EITC program would incentivize work and encourage individuals to seek employment. [6] First of all, it gives reward for work, thus making work more appealing to individuals. Not only does it appeal to people relying on welfare, but statistics are also indicative it has positive employment effects. [8] Essentially, the encouragement of work also facilitates higher employment rates.

Poverty Reduction
One of the most important benefits of the EITC and similar programs is its implication on impoverished individuals and families. It's removed millions of people from poverty [9] and actually has implications that can lead to the prevention of future poverty. This includes benefits to infant health (which eliminates unnecessary health costs and improves overall health). [10] Moreover, it shows that it will lead children to receive better test scores. [11] The subsequent result is a better education, which makes it easier to find a job that won't result in wages that are too low for sustenance. These benefits suggest the EITC is effective at both reducing and preventing poverty.

Quality of Life
By improving health, test scores, and poverty, the EITC concurrently improves the quality of life for millions of Americans. The Annie E. Casey Foundation highlights the aspects which improve quality of life for citizens nation-wide: "The credits provide crucial income that hard-working families can use to reduce debt, fund savings, offset education costs, buy a car to get to work, or make the down payment on a home. And they bring millions of dollars into the economies of distressed rural and urban communities." [12] These indubitably assist quality of life for these poverty-ridden families.

Conclusion:
The EITC would assist in the potentially extensive endeavor of simplifying tax code while simultaneously acting as a superior alternative to raising the minimum wage, stimulating the economy, reducing poverty, and increasing employment.

Sources:
[1] http://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit
[2] https://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit
[3] http://www.brookings.edu/research/papers/2014/06/19-building-success-earned-income-tax-credit-hoynes
[4] Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001
[5] http://www.taxcreditsforworkingfamilies.org/the-2016-presidential-race-where-the-candidates-stand-on-tax-credits/
[6] https://www.eiseverywhere.com/file_uploads/905fd969fc433b7cdc9394bebec22525_submission_10063_190978.pdf
[7] http://www.grbj.com/articles/print/67245
[8] http://www.nber.org/digest/aug06/w11729.html
[9] http://equitablegrowth.org/real-success-earned-income-tax-credit/
[10] http://www.nber.org/papers/w18206
[11] https://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1927
[12] http://www.aecf.org/m/resourcedoc/AECF-BFES-EITC-2005.pdf

Thoughts?
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u
ColeTrain
By ColeTrain | Nov 4 2015 2:29 AM
First citation (Photo where EITC has been "demonstrably successful" :(
"Man is not free unless government is limited" -- Ronald Reagan
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ColeTrain
By ColeTrain | Nov 6 2015 12:27 PM
Bump... Admin did you see this? :P
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u
admin
By admin | Nov 6 2015 12:37 PM
ColeTrain: Nope, where was this hiding!?

In general I'm a fan of making taxes more progressive. So increasing the real income of the poor relative to the wealthy is a good thing. However, from what little I know about it, the tax credit relies on people being able to earn a decent income in the first place. This means:
1. People must be able to survive off what they earn before tax, and
2. People must be able to find work
So while I feel like such tax incentives are certainly not too problematic, I feel like it should be part of a programme that also addresses #1 and #2 above. In this sense I don't see the minimum wage as being in competition with this, as the minimum wage is one way of dealing with #1.
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ColeTrain
By ColeTrain | Nov 6 2015 12:44 PM
admin: I figured you would have responded if you had seen it, that's why I tagged you. :)

n general I'm a fan of making taxes more progressive.
I'm not... but I only support the EITC because I think it will mitigate poverty more effectively than any policy we've seen so far, and would be superior alternative to raising the MW. (Essentially, it has a three-pronged effect: reduces poverty, increases employment, and decreases reliance on welfare)

1. Perhaps -- though some jobs don't pay enough (and rightfully so) for complete sustenance, so I think the EITC can do that
2. The EITC would incentivize work (and really, there's jobs out there for those who really want them, most of the time)
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u
admin
By admin | Nov 6 2015 12:52 PM
ColeTrain: The minimum wage also decreases the reliance on welfare and incentivises employment, it's whether it has an effect on the employment rate that's the question. Essentially some economists think the MW reduces #2 even as it increases #1, but regardless, that still doesn't mean it's in competition with a tax credit. They ultimately are different programmes for different ends (making more money vs keeping more money). Other approaches to #1 might be, for example, for the government to invest highly into research to provide more high-value goods and services, but that relies on the goodwill of the employers to pay their employees a fair wage - something that unfortunately doesn't always happen.

If the job doesn't pay enough for a person to survive, tax credits won't pay them more, just allow them to keep more of what they earn. So unless a person's total income is high enough, there will still be a problem here (doesn't mean every job needs to pay living wages necessarily, but it does mean each person's total income needs to be high enough, and the government should be ensuring that).

I think the role of the state is to ENSURE that there are jobs out there that people can reasonably do. It's not enough to simply assume jobs will just appear. Incentivising business growth is one way to achieve this; directly creating work is another.
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ColeTrain
By ColeTrain | Nov 6 2015 1:00 PM
admin: The minimum wage, when effective, reduces the reliance on welfare. However, raising it simply WILL NOT achieve that end... It's the economic theory of supply-and-demand that shows a MW can't reasonably have a net positive effect (unless there are external factors, obviously). I see what you mean, though, it makes a lot of sense.

Exactly, but the incentivization of work allows more employment. And, reasonably, employment (even without federal wage mandates) will provide enough (especially when accompanied with an EITC) money for a small family to live off of... The thing is, too many MW jobs are held by teens to raise the MW. I feel like I'm not explaining really well, but oh well. Lol

I'd generally agree.
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u
ColeTrain
By ColeTrain | Nov 6 2015 1:04 PM
admin: I also think this gives a fairly good interpretation of the MW in non-partisan fashion... It shows my general supply-and-demand theory as well... I think it's important to understand the MW hike proposals in relation to the EITC because the EITC will only work (with MW) if the MW does its part to increase job opportunities. Since it doesn't (don't make me go into why lol), the EITC wouldn't be very effective for actually mitigating *poverty* were the MW raised.
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u
admin
By admin | Nov 6 2015 1:26 PM
ColeTrain: I think we might need another thread on the MW in that case :D
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ColeTrain
By ColeTrain | Nov 6 2015 1:40 PM
admin: I bumped the other thread, if you want to direct the discussion there. ;) If not, we can make a new MW thread. I'm a big addict. ;)
"Man is not free unless government is limited" -- Ronald Reagan
Topics: http://tinyurl.com/oh9tm6u