Tag Archives: Earned Income Tax Credit

How to Lower Income Inequality

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My last post provides evidence that income inequality has increased more under recent Democratic presidents than under Republican presidents.  Here is a brief summary of the argument:

  • Cheap money is of greatest value to those who have access to it.
  • The effects of the Bush housing bubble (in the 2000s) were more evenly distributed than for the Clinton stock market bubble (in the 1990s) or the Obama credit bubble.
  • Two earner households are the backbone of the American middle class.
  • During the first six years of the Obama presidency, the number of two-earner households declined, the number of single-earner households rose by 2.6 million and the number of no-earner households rose by 5 million. In other words, two-thirds of the increase in the number of households under Obama is accounted for by households with no-one working. This largely accounts for the shrinking middle class and the increase in inequality.
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Another way to consider this situation is to look at the labor force participation rate which has been steadily decreasing since the year 2000.  As the above chart shows, this trend is expected to continue indefinitely in the same downward direction.  Along with a slowing increase in the productivity rate, this constrains the U.S. economy’s capacity to expand. Clearly what is needed is faster economic growth in order to create more jobs and better paying jobs.  The way to accomplish this is with:

  • Tax Reform. Lower individual and corporate tax rates for all paid for by shrinking deductions and closing loopholes. More money in the hands of the middle class will stimulate demand. More money in the hands of small business will stimulate supply.
  • Expanded Earned Income Tax Credit. Putting more money in the pockets of low-income and marginally employed workers will encourage more of them to find work and stay in the workforce.

With all the headwinds holding the economy back, our national leaders (and would be leaders!) ought to be focusing much more attention on taking specific actions which would speed up economic growth.

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Combating the Politics of Distrust

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My last post, “The Politics of Distrust” presents the view that the main reason for the divisiveness of today’s politics is “the stubborn torpor of the American economy.” If this is true then the solution is obvious: speed up economic growth!
CaptureA couple of weeks ago the economist Alan Blinder, a Hillary Clinton advisor, had an Op Ed in the Wall Street Journal, “A Fairness Agenda for Winning Over Angry Voters” with which I largely agree. Here are the highlights of Mr. Blinder’s fairness agenda:

  • A labor market tight enough to leave employers scouring the land for workers, the best tonic for workers the world has ever known. Mr. Blinder does say that looser purse strings by Congress would help create more demand but it is simply too risky to keep running up our already enormous national debt. Eventually interest rates will return to normal and interest payments on the debt will skyrocket.
  • Raising the federal minimum wage would be an enormous help for wage earners at the bottom. Many states and cities are doing this on their own which is a better way to go because of huge regional differences.
  • Increase the Earned Income Tax Credit, especially for childless workers. A very good way to incentivize work.
  • More Vocational Training and Apprenticeships. Strengthening community colleges and career education in high schools would go a long way to accomplish this.
  • Provide quality pre-K education for families who can’t afford it. Early childhood education for children from low-income families is another very good idea.
  • The tax code is a national disgrace. The corporate tax may be even more complex, inefficient and unfair than the personal tax. The mantra of tax reformers has always been: broaden the base, lower the rates. Amen!

What Mr. Blinder is calling a fairness agenda turns out to be a growth agenda in disguise. I would add a few more items like deregulation to encourage entrepreneurship and business expansion but basically Mr. Blinder has suggested an attractive program for economic growth which should appeal to a broad collection of political interests.

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How Do We Boost Middle Class Jobs?

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Income inequality is a serious political issue these days as it should be.  America’s future well-being depends on widely shared prosperity.  One of the very best ways to lessen inequality is to increase mobility into the middle class.
Capture  The political and economic analysis group, FiveThirtyEight, has just reported new data (see above) that “Mid-tier Jobs Are Seeing Less Growth.”  The middle class has already been hollowed out by the gale-wind forces of globalization and technological advancement.  Now the Great Recession, and the slow recovery from it, has made things that much worse.  It’s long past time to focus on middle class recovery.
The best way to do this is to make the economy grow faster as follows:

  • Tax Reform. Lowering individual rates should be the first priority, paid for by closing loopholes and shrinking deductions for the wealthy. This will give middle- and lower-income workers more money to spend and encourage startup small businesses. Lowering corporate tax rates, again offset by shrinking deductions, will incentivize multi-national corporations to bring their profits back home for distribution or reinvestment.
  • Increase the Earned Income Tax Credit, paid for with some of the increased revenues from shrinking deductions for the well-to-do. This will encourage more people to take and hold onto entry level low-wage jobs, thus increasing the size of the workforce.
  • Putting More Emphasis on Career Education in High School. Not everyone wants to or needs to go to college. There are lots of well-paying middle class jobs for high skilled workers and a shortage of workers for these jobs in many labor markets.
  • Miscellaneous. Immigration reform, trade expansion, and easing regulations on small business would also help grow the economy.

 

Economic growth since the end of the Great Recession in June 2009 has averaged a meager 2.3%. Speeding up growth is the best way to raise wages and lower unemployment at a much faster rate.  This is the best way to boost middle class jobs!

How To Address Inequality: A Summary

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I have had many recent posts addressing the problem of income inequality in the United States and what can and should be done about it.  Below is a chart, from the Congressional Budget office, which also appeared in my December 24, 2013 post.  It shows that all income groups have made gains since 1980 but that higher income groups have gained the most.
CaptureThis means that income inequality is increasing.  The question is what to do about it.  My own attitude is to try to provide more economic opportunity for low income people.  How do we do this in the most effective way?

  • First and foremost by stimulating the private economy to grow faster and therefore to create more and higher paying jobs.  This can be done with broad based tax reform (lowering tax rates offset by closing loopholes), fiscal stability achieved by eliminating deficit spending, expanded foreign trade for a more efficient global economy, and finally, immigration reform to give legal status to undocumented workers and allow more high skilled foreigners to immigrate to the U.S.  Such measures as these require action by Congress and the President.
  • Secondly, by improving human capital, meaning fixing underperforming schools, improving rundown neighborhoods, combatting inner city crime more effectively, providing at least part-time jobs to young people and combatting teenage pregnancy. Problems such as these are best addressed at the state and local level.
  • Finally, providing more motivation for the unemployed and underemployed to find jobs and hold onto them.  A very effective way to do this is with the federal Earned Income Tax Credit.  It supplements the salary of working adults with children.  New York City is conducting an experiment to see if a similar program will also motivate childless adults to try harder to find work and stay employed.

Conclusion:  the best way to address inequality is to give people the best possible opportunity to obtain full time employment.  This means 1) creating more jobs, 2) providing better qualified workers for all jobs and 3) motivating the unemployed more strongly to find jobs and hold on to them.
Government at all levels can help people find jobs, in one way or another, and therefore become more productive citizens.  This will lead to a happier, healthier, and therefore a stronger society.  All of us will benefit from this happening!

Should Government Address Inequality Directly?

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Wall Street Journal columnist William Galston suggests in “Where Right and Left Agree on Inequality”, that both sides of the political spectrum agree that economic inequality is increasing in America and that government needs to address this problem.  “Poverty is part of the explanation, as liberals insist.  But so are parenting and family structure, as conservatives believe.”
CaptureIt so happens that we have a broadly supported federal program which simultaneously addresses both poverty and family structure.  It is the Earned Income Tax Credit program.  It provides $3,305 a year to low-income working families with one child and up to $6,143 for families with three or more children.  The U.S. spends $61 billion a year on this program and it has proven to be very successful in encouraging low-income people to find and keep jobs.  In fact, the economist, Gregory Mankiw, recommends the EITC over a higher minimum wage as a better way to increase the earnings of the working poor.
The New York Times’ Eduardo Porter reports in “Seeking Ways to Help the Poor and Childless”, that New York City is conducting an experiment to see if a locally run program similar to the EITC  will have the same positive effect in increasing employment of childless adults.  It is understood that many of the jobs being created in today’s economy are low paying service jobs.  As Mr. Porter says, “for the American market economy to remain viable, being employed must, one way or another, provide for workers’ needs.”
Conclusion:  as important as it is for Congress and the President to adopt measures to increase economic growth (e.g. tax reform, fiscal stability, expanded foreign trade, immigration reform), in order to create more and better paying jobs, government also has a responsibility to provide direct help to the needy who are trying to help themselves.  The EITC program is an excellent way to do this!