a photo of the Internal Revenue Service building.
The tax man. Susan Walsh/AP

A new proposal for a Universal Earned Income Tax Credit could unlock the poverty-fighting powers of no-strings-attached money.

As far as most of the country is concerned, universal basic income—that’s when the government just, like, gives people money—is the stuff of NBER white papers and Star Trek economics. Beyond a handful of notable experiments, like a pilot program in Stockton, California, to give 130 random residents $500 a month for a year and a half, UBI demonstrations—in the U.S. at least—are more elusive than UFOs. That’s at least in part because the premise itself is so fundamentally antithetical to the American mythology of self-made men and women: Handouts are for places like Finland.  

But with job-eating automation looming and the wealth gap growing, the essential logic behind UBI—a no-strings-attached cash transfer program that helps vulnerable low-wage households from teetering into ruinous poverty—is more relevant than ever. And we might not have to wait for a socialist revolution or an Andrew Yang presidency to see what it might look like in the United States. Leaders in the here-and-now are thinking about ways to expand a conventional tax credit to guarantee the wages of low- and middle-income working households. Changes to the tax code could help to make up the wage stagnation that has dragged the economy for more than a generation.

The key is the Earned Income Tax Credit, a favorite poverty-fighting tool among progressive economists and, increasingly, Democratic presidential candidates. More than 25 million tax filers claimed the Earned Income Tax Credit in 2018, for an average refund of nearly $2,500. Expanding this wage credit to $10,000 would lift virtually all low-income households headed by a full-time worker out of poverty, according to a new report from the Urban Institute & Brookings Institution Tax Policy Center.

“For the first time in decades, low- and middle-income workers would share in economic gains even if the factors suppressing market wages do not reverse,” reads the proposal by Leonard Burman, an Urban Institute fellow.

As it’s currently construed, the Earned Income Tax Credit supports working low-income households with children. It’s a substantial enough subsidy that these households plan their annual spending around it. Anyone who has ever eagerly anticipated a tax refund understands this, although for some working families the credit can amount to as much as 40 percent of annual household income. Yet the Earned Income Tax Credit is only progressive-ish at best, since it provides little to no help for working households without children or for middle-class families.

Burman’s paper calls for replacing the Earned Income Tax Credit with a Universal Earned Income Tax Credit, which would “provide meaningful assistance for low- and middle-income workers whether or not they have children living with them.” This universal tax credit “would not directly penalize two-earner couples,” he writes.

(Tax Policy Center)

The fixes are straightforward, albeit ambitious: The universal tax credit would be based on individual income, not household income, so dual-income households would benefit. Family makeup would no longer be a factor, so childless workers would earn more from the credit, too. The universal credit would apply to 100 percent of earnings up to a maximum $10,000, extending its reach into the lower middle class. Burman also tacks on changes to the the Child Tax Credit, making it fully refundable, which would be a huge boost for very low-income parents. Further, Burman proposes a way to pay for the Universal Earned Income Tax Credit: a new value-added tax of 11 percent.

That pay-for element distinguishes the Tax Policy Center concept from Senator Cory Booker’s Rise Credit, Senator Kamala Harris’s LIFT the Middle Class Act, Senator Sherrod Brown’s Working Families Tax Relief Act, or the Economic Security Project’s Cost of Living Refund—all of which are otherwise fairly same-same. Any eventual effort to improve or expand the tax refund as part of the social safety net is bound to draw from some or all these drafts. The idea is to accomplish through the tax code what might be impossible through legislation, given the current partisan gridlock.

Progressives are circling around the Earned Income Tax Credit for good reason. Work is popular, as Burman notes, and a credit that both rewards and encourages employment avoids the “welfare” specter that has haunted means-tested transfer programs for years. President Donald Trump, a lifelong welfare opponent, has made work requirements a cornerstone of his domestic agenda; his administration even floated consolidating aid for food, health, and housing into a single Department of Welfare, a likely ploy to undercut these programs.

Washington’s willingness to tamper with the tax code gives the tax credit more flexibility than spending programs that are inevitably in the crosshairs. For example, the category of eligible work could be expanded to include full-time caregivers, which would make it far more inclusive. And if, eventually, nobody works at all, thanks to the robots, then the Universal Earned Income Tax Credit could easily be converted to a traditional UBI program—the politics of which will likely change once algorithms replace lawyers, accountants, and professional bloggers.

The best demonstration of the potential for expanding the Earned Income Tax Credit may not be the UBI experiment playing out in Stockton but rather a local tax tweak enacted in Washington, D.C. The District passed a 40 percent match for all federal Earned Income Tax Credit recipients and doubled the number of childless workers eligible for the local credit. The city has found that the expanded tax credit has encouraged work and offset poverty for low-income wage households. That’s in essence the goal of a universal basic income.

“In the short run, the effects of the UEITC and enhanced CTC might not differ that much from a UBI,” Burman writes. “The primary market problem at present is not that jobs are unavailable, but that they pay poorly. A wage credit deals with this shortcoming directly.”

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