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 TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Credit (EITC) with a low-income wage subsidy.
“I am developing legislation to replace the earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. 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 creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income 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.”Share