For all the talk in political circles about closing the gap between rich and poor, few ideas to address the problem can pass two simple tests: Are they effective, and can they be enacted in this deeply divided ideological age?
The federal earned-income tax credit is one idea for which the answer to both questions is yes. California lawmakers should adopt a state version of this tax break for the poor. Sen. Carol Liu, a Los Angeles-area Democrat, is carrying a bill to implement an earned-income tax credit, as are Assemblyman Mark Stone, D-Scotts Valley, and others.
The earned-income tax credit was first signed into law by Republican President Gerald Ford in 1975 and expanded by President Ronald Reagan in 1986.
The idea behind the credit was to offset part of a family’s payroll and income taxes as they move from welfare to the workplace. Otherwise, the hit on their standard of living would be so great that it would reduce the incentive to leave public assistance.
The credit phases out as a family’s income climbs, helping to prevent a shock to their income. The income cap is about $50,000 a year for a couple with two children.
About half the states have their own version of the credit. Most give workers a flat percentage of the federal tax credit to ease the administrative burden on state tax collectors.
We have supported increases in the minimum wage. But the earned-income tax credit has some advantages over a mandated wage hike.
One is that the credit can be targeted at the people who need it most: the full-time working poor. Much of the benefit of a minimum-wage increase goes to teenagers and spouses working part time in families whose incomes are well above average. But all of the EITC’s benefit goes to low-income families.
The earned-income tax credit minimizes any threat to job creation. Studies have shown that a minimum-wage increase can depress employment by driving up the cost of doing business. But the tax credit, because it is funded by all taxpayers and not only by employers, spreads that cost throughout society.
A state version of the EITC would not be cheap. A 15 percent credit would move 120,000 people out of poverty at a cost to the treasury of $1 billion. It could be narrowed to target the lowest-income workers, at $450 million a year, the Legislative Analyst says.
Long-term measures to help people escape poverty with better education and training are crucial. But an earned-income tax credit is a proven way to help the working poor.