On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
- The Tax Policy Blog
- Marco Rubio Proposes a Replacement for the Earned Income ...
Marco Rubio Proposes a Replacement for the Earned Income Tax Credit
This week, Senator Marco Rubio (R-FL) took advantage of the 50th anniversary of the War on Poverty to announce a plan to reform the way the United States fights poverty.
In his speech he mentioned that he wants to replace the Earned Income Tax Credit (EITC) with a low-income wage subsidy.
“I am developing legislation to replace the earned income tax credit with a federal wage enhancement for qualifying low-wage jobs. This would allow an unemployed individual to take a job that pays, say, $18,000 a year – which on its own is not enough to make ends meet – but then receive a federal enhancement to make the job a more enticing alternative to collecting unemployment insurance.”
Currently, the Earned Income Tax Credit is a refundable tax credit that is targeted at low-income taxpayers. The credit is designed to increase in generosity as taxpayers earn more money. Once taxpayers reach a certain income level, the credit maxes out (From a $496 credit for taxpayers with no children to a credit of $6,143 for taxpayers with three or more children.) After taxpayers hit another income limit, the credit begins to decrease, until the taxpayer earns enough for the credit to phase-out to zero.
In 2013, the Earned Income Tax Credit cost the government $58 billion according to Treasury.
It is not entirely clear what form the replacement wage subsidy will take. It could take the form of a tax credit to employers who hire low-income workers or a transfer to low-income workers. Either way, Rubio believes that the subsidy will be an improvement over the EITC.
He Believes the Wage Subsidy is a Better Alternative to the Minimum Wage than the EITC
Many supporters of the Earned Income Tax Credit see it as a better alternative to the minimum wage. The structure of the EITC has been shown to increase workforce participation at the very bottom of the income scale. This is in contrast with a minimum wage hike (supported by the President), which would lead to higher unemployment among these workers.
One weakness of the EITC compared to the minimum wage, however, is the fact that low-wage workers only see the refundable tax credit once a year in a lump sum, rather than a small increase in their paycheck over a full year. Senator Rubio wants to create a wage subsidy that does not have the negative employment effects of a higher minimum wage and “would arrive in sync with a monthly paycheck rather than a year-end lump-sum credit.”
He wants to Reduce Fraud and Abuse in the Tax Code
Currently the Earned Income Tax Credit has one of the highest payment error rates of all federal programs that cost between $11.6 and $13.6 billion in 2012. Whether these payment errors are due to intentional fraud and abuse or the program’s staggering complexity is up for debate (it is likely a mixture of the two). Either way, politicians see these payment errors as a problem worth addressing.
Senator Rubio believes that a wage subsidy, however he is planning on structuring it, will be less prone to fraud: “the enhancement will be highly targeted to avoid fraud or abuse and the amount will depend on a range of factors.”
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.