Having recently discussed Kevin Hassett’s call for more aggressive federal efforts to fight long-term unemployment, I thought I’d mention a 2009 paper he co-authored with Lawrence Lindsey and Aparna Mathur on creating a unified credit for low-income workers. Late last year, Harvard economist Edward Glaeser called for the consolidation of federal social policies, and in particular six large programs: TANF, Medicaid, SNAP, housing vouchers, unemployment insurance, and the EITC. His argument was that while the adverse incentives in any given program were manageable, the cumulative impact of all six programs was an extremely high effective tax rate on low-earners. Hassett, Lindsay, and Mathur argue along broadly similar lines, yet they focus on seven tax credits for low-earners:
Currently, the tax code allows low-income individuals and families (at varying income levels) more than seven different tax credits (including the refundable and non-refundable portions of each credit). The credits are either tied to certain expenditures such as child care expenses, education expenses or are provided as incentives to low-income families who work. Each has varying income and other eligibility requirements, different schedules, different maximum credit values and different phase-in and phase-out ranges, adding layers of complexity and high marginal tax rates even at the lower end of the income distribution. Replacing all of these credits together with a simple policy, therefore, holds significant promise, and we discuss several options to do so.
What follows is a detailed discussion of the various credits and the incentives they create for low-earners. One of the more intriguing points made by Hassett et al. is that the work disincentives of a “cliff” — an abrupt cutoff of benefits at a given level of benefits — are in some sense better than the work disincentives of a gradual taper, in which benefits are reduced at a rate below 100 percent as income rises. Low-earners will likely refuse to take jobs that pay more but not enough to make up for the loss of the credit, but high-earners beyond the threshold will be less tempted to reduce work hours to become eligible. But in the end the authors reject this option on the grounds that despite its simplicity, the effective tax rates for workers right at the cliff would be unacceptably high. They conclude by tentatively endorsing the following basic design:
If we had to choose among the several alternatives, however, we believe that the most practical policy is one that phases in at a rapid rate and phases out at a rate of about 22 percent for every additional dollar earned, the maximum phase out rate faced by individuals under the current tax code. By further restricting the availability of this credit to families with children and work related income and ensuring that the total cost of the credit does not exceed the costs of the current system, we could ensure to some extent that the proposed new credit achieves the goals of distributional and revenue neutrality.
A unified credit that applies to childless adults as well would be more expensive, but it would have the added benefit of benefiting large numbers of less-skilled men.