If a nation wants to increase productivity, it is natural to focus on promoting innovation, improving education and decreasing regulation. But a positive step, potentially supported by Republicans and Democrats alike, could come from an unlikely place: increasing both the availability and the size of the earned-income tax credit.
True, the EITC is not normally thought to promote productivity at all. Most people see it as an antipoverty measure, designed to help the working poor. Its goal is to redistribute wealth, not to increase it.
But that’s much too simple.
True, the EITC helps poor people. It does so by giving a tax credit to those who work but earn little money. The amount of the credit depends on how much people make and how many children they have. For 2017, the maximum for people without qualifying children is $510. For those with three or more qualifying children, the maximum is $6,318.
That’s a significant amount of money, and it helps not only to reduce poverty but also to improve the health of women and children. But the EITC is not just a welfare program. It also pays real dividends for the economy, by encouraging people to enter the workforce.
Numerous studies have found that the EITC leads to major increases in employment for single-parent families with children. Hilary Hoynes of the University of California at Berkeley and Ankur J. Patel of the U.S. Department of Treasury found that the 1993 expansion of the credit led to an increase of 6.1 percentage points in the employment of single mothers. On the basis of that finding, they estimate that a $1,000 annual increase in the EITC ends up producing a 7.3 percentage-point increase in employment.
Of course, it’s hazardous to enlist findings from a change in 1993 to specify the employment effects of increasing the EITC in 2017. And, indeed, critics of the program offer some qualifications. As incomes rise, the size of the credit is reduced, and, to that extent, the program creates an incentive for people to work fewer hours.
But there is little doubt that, on balance, this antipoverty program spurs employment and therefore productivity. In that respect, significant increases in the EITC are much better than significant increases in the minimum wage, which can decrease employment (by increasing the cost of hiring and retaining workers).
True, a program that gives a federal subsidy to employers who hire low-income workers makes it unnecessary for them to pay workers as much as they otherwise would. But that’s not exactly the worst thing. If the EITC makes hiring less expensive, it promotes job creation and potentially productivity.
Three steps can and should be taken to improve the current system. The first, and the simplest, would be to help currently eligible working people to get the credit.
According to some estimates, over 20 percent of eligible families do not receive it, in part because they do not know about it, and in part because it is not easy to apply for it. In the coming months, the Internal Revenue Service could simplify the system — and perhaps even give the credit automatically to those who are known to be entitled to it (according to available data).
The second step would be for Congress to make the credit available to childless people under 25. Currently, that group is excluded from the program, even though its members have disturbingly low levels of labor-force participation. The EITC would provide them with a new incentive to find jobs.
The third step would be to increase the credit. It would be simple to adopt an across-the-board boost — say, 10 percent — with the expectation that it would increase labor-force participation. Here again, the challenge is that under the existing program, the credit is decreased as lower-income workers earn more, which creates a disincentive to work more hours. But there is no evidence in the real world that this disincentive is leading a lot of low-income employees to work less. On balance, an increase in the credit would promote labor-force participation.
While increases in productivity often turn out to decrease poverty, most antipoverty programs do little or nothing to increase productivity, at least when they simply transfer money to the poor. The earned-income tax credit is an honorable exception.