The tax break everyone likes
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
President Obama has released his budget for the 2015 fiscal year; you can read Shane’s massive guide to that 1656-page document here. The most striking detail, Shane writes, is Obama’s proposed expansion of the Earned Income Tax Credit, which provides direct cash transfers to low and moderate-income workers; the official case for the increase is made by the chair of Obama’s Council of Economic Advisors, Jason Furman, in the journal Democracy.
Tim Fernholz says that Obama is tackling income inequality “with a twist of the tax dial.” Zachary Goldfarb has the details: the proposal would effectively double EITC so that many working families would get 15.3 cents back on every dollar they earn up to $6,570, for a maximum of $1,005. The current rate is 7.65 cents, for a maximum of $503. Jackie Calmes adds that the proposal raises the annual maximum income levels to qualify for the EITC, and lowers the minimum age to 21 from 24 (though students still don’t qualify). It also makes the EITC more generous for childless workers, an idea that MIT economist David Autor told Calmes “just makes a lot of sense”.
This is all projected to cost about $60 billion, and Obama proposes to pay for it by closing the carried interest loophole and various other tax loopholes used mainly by the wealthy. David Wessel points out that many of the same loopholes are closed in David Camp’s tax reform plan.
Indeed, the EITC itself has broad bipartisan support. Jonathan Chait writes that it is a poverty-fighting method that Republicans have long favored: in fact, they have been proposing it for a while (see the AEI, Glenn Hubbard, and Marco Rubio). In January, Greg Mankiw wrote that “what is most disappointing about the president’s proposal [to increase the minimum wage] is that the federal government has the option of using the much better Plan A. It is called the earned-income tax credit”.
The EITC has proved to be one of the most effective tools for both fighting poverty and encouraging work. People are only eligible for the EITC if they are employed. According to the Center for Budget and Policy Priorities, “EITC expansions between 1984 and 1996 accounted for more than half of the large increase in employment among single mothers during that period”. A paper by Molly Dahl at the CBO found that women who were encouraged to find work in order to qualify for the EITC advanced in their jobs and saw their incomes rise, at least in the few years that the researchers studied.
James Pethokoukis doesn’t have any specific arguments against the EITC increase, but is generally wary of a budget that increases the federal tax burden to 19.2%. “In the history of the American Republic, the total federal tax burden has only once topped 19% during peacetime”, he writes. — Shane Ferro and Ryan McCarthy
On to today’s links: