The working class is back in the spotlight. After a nearly two decades of focus on the middle class, the election of Donald Trump has awakened political elites to the problems facing families not rich enough to start a 529 plan for their kid but not poor enough to be eligible for Pell grants. The realization that the party best able to court the working class is likely to sustain an electoral advantage in the coming years has Democrats and Republicans suddenly jockeying for their allegiance. As process of tax reform begins, it is clear that the first battle in the war will focus on family-related tax benefits. Both parties are quietly considering a number of think-tank proposals for modifying the earned income tax credit (EITC) and the child tax credit (CTC). That is where the similarities end, though. Among liberals, the familiar mindset that any problem can be solved by throwing more money at it or introducing yet another program ignores fiscal reality and threatens to further balloon the deficit. In contrast, reform conservatives are increasingly recognizing that getting our fiscal house in order is a prerequisite for effective reform of family-related tax benefits.
Representative Ro Khanna (D., Calif.), for example, recently made a splash with his proposal to increase the EITC to $3,000 (currently $506) for workers without children and to $12,131 (currently $6,269) for families with three or more children. If you think that sounds too good to be true, you are right. With a $1.4 trillion price tag over the next decade and no plans to pay for it, Khanna’s EITC would drive us much deeper into debt. The same problem plagues the proposals for expanding the CTC that are coming out of liberal think tanks. The costs range from an additional $30 billion per year under the Center for American Progress proposal to $203 billion per year under the Century Foundation proposal. The source of revenue for these proposals remains a mystery.
Canada’s Conservative government faced the same problem in the 1980s. Under the leadership of Brian Mulroney, they undertook a sensible program of rationalization and consolidation of the existing maze of tax benefits. Importantly, they did so in a revenue-neutral manner. Between 1985 and 1988, they reduced the value of the dependent exemption and plowed the savings into a fully refundable CTC. As part of their 1988 tax reforms, they turned most tax exemptions into nonrefundable tax credits. Finally, in 1992, they consolidated what was left of the exemptions and various tax credits into a single refundable CTC. Ironically, the obstinacy of the Left almost derailed the whole process, as anti-poverty and labor groups opposed anything less than a deficit-inducing massive increase in benefits. Luckily, the Conservatives recognized the value of a simplified system of pro-family, pro-work tax benefits, ignored the critics, and pushed ahead with the reforms.
How might similar reforms unfold under a unified Republican government? The first step would be converting the existing $4,000 personal exemption into a $600 nonrefundable personal tax credit. This would skew benefits downward toward the working class, ensuring that families outside the top quintile pay the same or less in taxes and creating savings for other pro-family policies.
The existing EITC is rife with error and fraud because of its complexity and the fact that refunds can exceed total tax liability.
Lastly, policymakers should combine the savings from the previous two reforms with the consolidation of all remaining child-related tax benefits into a $3,000 fully refundable child tax credit. This would greatly reduce complexity, encourage work and marriage, and shift additional benefits to working-class families. Unlike liberal proposals, it could be financed through savings from the elimination of existing programs. Any additional revenue required could and should come from ineffective or repetitive social-assistance programs such as those outlined by Samuel Hammond and Robert Orr or myself.
The push for comprehensive tax reform has given Republicans the opportunity to show working-class voters that the GOP understands their concerns, but Congress and the Trump administration still need to show they have a concrete policy agenda to address them. Streamlining family-related tax benefits while expanding them in a fiscally responsible manner is an effective policy reform that helped keep Canada’s Conservative government in power for a decade. It will likewise resonate with American voters in 2018 and beyond as the GOP seeks to build its reputation the natural governing party of the United States.
Editor’s Note: This piece originally stated that Representative Khanna’s proposal was to increase the EITC to $6,800 for childless workers and that his proposal would have an estimated price tag of $2.4 trillion. These numbers were based on published reports about an earlier version of Khanna’s proposal. His updated plan proposes increasing the EITC for childless workers to $3,000.
— Josh McCabe is the associate director of the Freedom Project at Wellesley College.