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.
Conservatives, on the other hand, understand that we need to take stock of existing programs before we go hat in hand to the American people for more money. The truth is that we can squeeze more value out of existing programs through consolidation and better targeting. This would make the system more conducive to marriage, work, and social mobility, all at the same time, without breaking the bank. The federal government already administers over $170 billion in family-related tax benefits. This includes the CTC, EITC, dependent exemption, child- and dependent-care tax credits, and head-of-household filing status. Each has different eligibility rules. Many provide few or no benefits to working-class families, instead showering the majority of benefits on upper-income families. What are we to make of this mess?
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.
Second, policymakers should totally separate work-related tax credits from child-related tax credits. The EITC should be stripped of its child-related provisions, with a single phase-in rate of 15.3 percent (equal to the combined Social Security and Medicare payroll-tax liability) and a maximum benefit of $1,850 beginning at $12,000 (the poverty threshold for single workers) for all eligible taxpayers. Both Barack Obama and Paul Ryan have made similar proposals. In effect, this would return it to its original purpose as a payroll tax offset for the working class. This would accomplish two major conservative policy goals. First, it would eliminate the situation in which combined income and payroll tax liabilities actually push some workers into poverty. The new personal tax credit would offset any income-tax liability and the EITC would offset payroll-tax liability for all working-class families. Second, the existing EITC is rife with error and fraud because of its complexity and the fact that refunds can exceed total tax liability. Eliminating child-related provisions and reducing the value of EITC in line with tax liability greatly reduces the likelihood for error and eliminates the incentive for fraud.
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.