The American Way of Poverty: How the Other Half Still Lives (44 page)

It was, Friedman argued, in a 1968 television interview with William Buckley in front of a large studio audience, “a proposal to help poor people by giving them money, which is what they need, rather than, as is now, by requiring them to come before a governmental official, detail all their assets and their liabilities, and be told you can spend x dollars on rent, y dollars on food, and then be given a handout.” In what Buckley called, in his impossibly aristocratic intonations, a “revolutionary idea,” Friedman explained that a family with no income at all would be entitled to get $1,500 back from the government, “available for its personal consumption.” But as soon as people within the family started working, until they reached what he called a break-even point in income, the negative income tax they received would increase, and thus they would have an incentive to start earning money. Friedman suggested that it was a way to break the infamous poverty trap created by the then-current welfare system—which penalized people when they began work by immediately cutting their benefits—by encouraging people to find employment rather than to stay at home in exchange for government aid.
²
Ultimately, he hoped, this income-tax-in-reverse would come to replace the entire cash-based welfare system.
³

Despite President Richard Nixon’s sympathy for the idea—at about the same time that the country’s thirty-seventh president came out in support of mandatory health insurance, provided by employers or through public subsidies, he also proposed a Family Assistance Plan that, if it had passed, would have essentially created a guaranteed baseline income for all Americans—ultimately Friedman’s more ambitious
ideas around the negative income tax didn’t materialize.
⁴
It was as politically difficult a sell in the 1960s as Zelleke’s updated version of the basic income guarantee would be nearly a half-century later. It smacked of “the dole,” of government control, of bureaucracy run amok.

Instead, what emerged a few years after Friedman began floating his concept was a de facto income subsidy for low-wage workers, in the form of the EITC.

In a polarized age, the tax credit was one of the few big institutional developments that could command, if not total, then at least widespread bipartisan support. No less a conservative than Ronald Reagan called it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” From the liberal side, Teddy Kennedy and George McGovern agreed.

Instituted in 1975, a year after Gerald Ford had assumed the presidency in the wake of a disgraced Nixon’s resignation, the tax credit was enlarged during both the Reagan and George H. W. Bush presidencies. In 1993, Democratic president Bill Clinton again expanded the program dramatically and used this expansion, in conjunction with welfare reform, to move more poor people into the workforce. Under the Clinton expansion, childless adults were given limited EITC subsidies, and parents heading large families were given larger subsidies. For families with two or more children, the extra money made available was enough to fairly dramatically alter their financial calculus.

In the decades following its introduction, approximately half of the states in America also introduced their own versions of the EITC, as a top-up to the federal one. Today, most Northeastern states already have generous earned income tax credits. In the South, though, politically the polar opposite of the Northeast, EITCs either don’t exist, or exist only to cancel out tax obligations rather than to provide actual income subsidies to the working poor. In some parts of the South, money families receive from the federal tax credit is then taxed by the state, reducing the overall value of the benefit. The results, not surprisingly, have been mediocre at best: In states without top-up EITC credits, health outcomes are worse, overall poverty
rates are higher, and the prevalence of childhood poverty in particular is far above that of the Northeast.

Studies of the efficacy of the tax credit, both at the state level and also federally, have shown not only that it removes millions of families from poverty, but that in doing so it dramatically improves the health of children born into these families, reducing the numbers of babies born at a dangerously low weight, leading to a reduction in the rate of premature births, and increasing newborns’ Apgar scores—all indicative of positive changes wrought by families accessing EITC money.
⁵

This is another no-brainer. The EITC does enough good that states without their own version in place are clearly harming their lowest-earning residents.

Expanding the EITC once more and providing states without EITCs of their own, or with only limited programs, a fiscal incentive to expand their tax credits ought to immediately be embraced as federal policy. As with Medicaid spending, for example, the federal government could institute a formula so that richer states bear more of the cost of these tax credit programs, while poorer states would receive larger federal subsidies. It would be an effective, and not terribly expensive, weapon in the arsenal used for tackling poverty in states and regions with some of the most entrenched hardship in America.

There is, of course, a flip side to this: What is to stop large companies from simply paying workers scandalously low wages, secure in the knowledge that the state would step in with generous EITC benefits to top-up the incomes of the working poor? Recall the abysmally low wages Walmart was paying Mary Vasquez in Texas. Or, for that matter, in a slack labor market, if more people are tempted into the labor pool by the existence of a tax credit, what is to stop the laws of supply and demand from simply driving down
wages—not just for EITC recipients but for all the low-end workers competing for entry-level jobs?

Such a problem isn’t entirely speculation. University of California at Berkeley economist and public policy professor Jesse Rothstein has done research that indicates precisely this flaw in the EITC. During a tight labor market, such as that present in the late 1990s, he calculated, companies such as McDonald’s were having to woo prospective employees with signing bonuses and relatively high wages. During a slack labor market such as that in the post-2008 period, however, no such incentives were needed. Unfortunately, labor markets are rarely as tight as they had been in the late 1990s. And so, averaged out over thirty or forty years, Rothstein averred, “Wages have gone way, way down. So thinking the solution is to get more people into that labor market, that just doesn’t add up.”

For sure, the Earned Income Tax Credit could push individuals into employment and help a certain number of individuals navigate their way out of poverty, but what it couldn’t do was raise the overall well-being of the entire working-age population. While EITC recipients—especially single mothers at the bottom of the income pyramid—still benefit, despite the driving down of wages, because of the additional dollars sent their way by the government, individuals not eligible for the tax credit actually end up worse off than they would have been without the program in place. The combination of more people competing for their jobs and employers using the tax credit as an excuse to drive down wages has proven disastrous for this group of people.

In 2009, Rothstein published a paper in which he wrote that while each dollar spent on EITC increased the incomes of women with children by $1.07, “this is accompanied by a decline of $0.34 in the net-of-tax incomes of women without children.”
⁶
Overall, because more people benefit than lose—and benefit by
more
than those on the short end of the stick lose—the tax credit still deserves some plaudits for limiting poverty, but, argued Rothstein, not quite in the unqualified manner that its advocates might believe.

The Berkeley economist’s calculations suggested that a well-administered negative income tax, which maximized the subsidy to workers earning zero and then gradually was reduced in value as incomes rose, would protect the entire labor pool better. Because workers are given a baseline income in this model regardless of whether they have jobs or not, they have less incentive to accept lower-paid employment, and thus higher wage levels are preserved.
You want me to work? Sure. But you’re going to have to pay a wage that I can reasonably be expected to live on
.

In theory, there’s no reason that the federal government couldn’t create a framework, similar to the ones discussed earlier, for a basic income guarantee nationally. Nor is there a reason that other states shouldn’t take Alaska’s lead and themselves introduce dividend funds to be distributed from revenues gained by more effectively taxing the use of scarce natural resources and the pollution generated by industries within the states.

Politically, given current rhetoric around taxes and government spending, this would be an extraordinarily hard sell. Even if it proved cost-effective to give everyone a monthly check from the government in lieu of the hodge-podge of programs and non-cash assistance that people currently use and then to reclaim that money from more affluent Americans come April when people file their taxes, convincing people of this in a world of fifteen-second sound bites would be a monumental challenge. The huge initial sticker price would scare many people off, even if the bulk of it could be recouped through back-end taxes and the cutting of programs, such as housing assistance, made redundant by the minimum income safeguard. The loss of familiar perks such as the mortgage interest tax deduction would terrify many voters, even if the net result of the new system was a wash for their families, and the sense that ever more people were coming to rely on handouts would prove anathema
to a society long suspicious of what conservatives have come to deride as an “entitlement culture.”

Inertia is, as physicists will tell you, a powerful force of nature. If for no other reason than that, it’s unlikely that the entire tax code and the massive infrastructure of government programs that distribute benefits to the American populace will be scrapped and replaced with a more holistic anti-poverty framework such as the basic income guarantee anytime soon.

And so we return to the more limited, but politically more sellable, EITC.

Let’s assume that this tax credit is too successful to scrap, that it is too embedded in the tax code to be entirely replaced by an alternative income-subsidy model. In which case, it would make a whole bunch of sense to make it better. Let’s shore the system up, with the creation of certain baseline minimum income levels ensured via a negative income tax, and with wage protections enacted to prevent employers from diverting much of the benefits of each EITC dollar to themselves rather than their employees.

How could that be done?

One solution would be to implement so-called big box living wage statutes, requiring mid- to large-sized companies to pay hourly wage rates that allow workers to rise out of poverty without government tax refunds having to kick in. Chicago tried to implement such a law in 2006, mandating that large companies with store sizes of above 90,000 square feet and annual revenues in excess of $1 billion, pay at least $10 per hour to employees. But ultimately city leaders were scared off by the threat from Walmart and other big stores that they would simply abandon the city. In the end, Walmart agreed to a starting wage of $8.75 an hour, fifty cents above Illinois’s state minimum. Facing a mayoral veto of the higher living wage, proponents were forced to sign on to the deal. Then, to rub salt in the wound, Walmart spokespeople went out of their way to say that this was similar to deals worked out around the country. In other words, according to the Walmart spin-meisters, the living wage
campaign hadn’t forced the mega-chain into any financial concessions it wouldn’t have agreed to anyway out of the goodness of its corporate heart. Believe that, dear readers, and you can find me after you’ve finished this book for a discussion about a bridge that I want to sell you in Brooklyn.