Obameter #5: the Earned Income Tax Credit

The Earned Income Tax Credit is a complicated, rather obscure aspect of tax law that generally tries to reward low-wage workers or workers facing unusual challenges for being productive members of the workforce to the tune of several thousand dollars each. Wikipedia estimates the total cost at something like $36 billion (in 2004). It's pretty complicated, though, with various fade-ins and fade-outs for taxpayers meeting various criteria. One of the unintended consequences of the EITC is the so-called "marriage penalty" wherein two single people filing taxes separately will pay less in taxes than if they marry and file jointly. This is because being an unmarried worker was once considered a hardship, so they increased the EITC for single people.

During his campaign, Obama made a three-part promise relating to the EITC:

1. To remove the marriage penalty.
2. To expand the credit for taxpayers with more than 3 children.
3. To expand the credit for taxpayers without children.

The stimulus bill he signed in February accomplished the first two points, but ignored the third.

I've addressed tax credits before, concluding that "With a tax credit, you're paying less money because you're conforming to more governmental rules." I remain wary of tax credits as a way for government to buy obedience from us taxpayers but, just as before, it's hard to criticize government for creating an incentive to work. Maybe it's a little easier now, since it's the second tax credit doing that exact same thing.

One risk of government paying low-wage workers to work is that it makes low-wage work seem better than it is. It's better than paying people to quit, as a badly designed unemployment program potentially could, but I continue to favor tax rate changes rather than rules and regulations regarding how you live your life. How much simpler it would be if all these eligibility programs with their complicated qualifications and dependencies were replaced with a negative income tax rate on the lowest tax bracket! But government continues to favor complicated systems of eligibility as though more laws means better laws.

And for them it does. Job security for Washington insiders, IRS agents, private accountants, and other experts on the unnecessary complication legislators create. They promise to simplify the tax code to get elected, but it keeps getting more complicated. Plus, again, they're buying your obedience. There's something creepily authoritarian about that.

$3,600b 2009 Federal Budget

Previously discussed wasteful spending

Previously discussed worthwhile spending

Earned Income Tax Credit (total cost)

Given the ugly, complicated system Obama inherited, though, he did act to simplify it by removing the marriage penalty. I suppose that deserves my tentative, cautious approval. But this is the last government-paying-people-to-work tax credit that I'll be supporting. Employers are supposed to do that, not government.

A little reminder: every pixel on that dollar bill graphic stands for $150 million dollars -- about 40 times as much as the average American makes over the course of an 80 year career.

Obameter #32: Making Work Pay

When Obama said he was offering a tax cut to 95% of American families, this is the program he had in mind: the Making Work Pay tax credit. According to a recent CBS editorial, 43.4% of the population pays zero (or less) in taxes. This exposes a mild deceptiveness to the idea of a "tax cut" for 95% of people, but it's a negligible complaint. In the sludgy pool of ineffective welfare ideas, paying people to work is one of the better ones.

The way Making Work Pay works is that the government pays you 6.2% of what you earn until you've earned $8,100. 6.2% of $8,100 is about $500. The House of Representatives proposed a bill that matched Obama's plans, but the Senate was worried about the cost of the bill and cut it down to a maximum of $400 per person. Obama signed it into law on 17 Feb. 2009. PolitiFact calls it a compromise, and such it is.

There is a fine distinction between a tax cut and a tax credit that this analysis ignores. A standard tax cut involves lowering the percentage of your income you're paying to the government; for example, dropping the tax rate on the first $8,350 from 10% (where it currently is) to, say, 3.8% would be a tax cut. A typical tax credit reduces your taxes by some specific dollar amount for doing something the government likes at an income level the government approves. For example, the US child tax credit program gives a $1,000 tax credit per child to families making under some specific income threshold (it's a complicated math equation to determine the exact threshold).

It is often mistakenly said that a tax cut can never produce a debt from the government to the taxpayer while a tax credit can. An obvious example of a tax credit creating a government payout to a "taxpayer" is a single parent making $8,100 a year. The tax rate declares that they owe $810 in taxes, but the child tax credit ensures at least a $1,000 credit from the government. The "taxpayer" in this case is making at least $190 from the government. However, a negative tax rate would produce a welfare program, too, and has been recommended by such great Republican capitalists as Milton Friedman. There is not really a distinction between tax cuts and tax credits on that point.

The real distinction is why you're paying fewer taxes. In a tax rate cut, you're paying less in taxes because the government is simply taking less money. With a tax credit, you're paying less money because you're conforming to more governmental rules. The former is an increase of freedom, whereas the latter is not. Usually the rules aren't very controversial things (having children, being gainfully employed, starting a small business, etc), but the government programs are potentially paying people for things that are not necessarily helping anyone be better off. The classic criticism along this line is the example of a welfare mom, a hypothetical woman who refuses to marry and has another kid whenever her budget doesn't quite stretch far enough. Not every taxpayer is delighted with the idea of their money being used to motivate single mothers to get pregnant again.

$3,600b 2009 Federal Budget

Previously discussed wasteful spending

Making Work Pay tax credit program

But how does this relate to Obama's MWP program specifically? After all, he's merely paying people a little to be gainfully employed. The final price tag on the program was $116.2 billion, which is about 3 cents on the dollar of Obama's budget for the year. The worst abuse of the system I can imagine is someone making exactly $6,451 a year in order to maximize the benefit from MWP. I don't expect the program to be hugely effective, but I've seen no way in which it's a horrible idea or open to severe abuses. If the Obama Administration would call it a tax credit and a welfare program, I'd have no criticism of it at all.