Last week, NR published “The Case for the Wage Subsidy,” an excerpt from Oren Cass’s excellent new book The Once and Future Worker, in which he calls for a souped-up alternative to the earned-income tax credit that has much to recommend it. But I suspect Oren would agree that short of his more ambitious proposal, there is much to be said for hiking the EITC itself, especially for childless workers. There is widespread agreement that an EITC hike for childless workers would stimulate labor-force participation and reduce poverty. The downside, of course, is that it would cost money. Over at The Atlantic, I recently offered a potential pay-for — a modest tax hike on upper-middle-income households. While I realize that this isn’t exactly a wildly popular idea, I see it as a “put up or shut up” proposition for the large and growing number of well-off voters who favor more redistributionist policies. Will you still favor them if you have to pay for them? As it turns out, though, there is reason to believe that an EITC hike might actually pay for itself, or rather it might come pretty close.
Recently, Jacob Bastian and Maggie Jones released a working paper that makes use of data from the Internal Revenue Service to assess behavioral responses to the EITC. Because the EITC encourages people to join the labor force and to increase their earned income, it tends to reduce reliance on other forms of public assistance and, over time, to increase taxes paid. Both of these effects tend to reduce the net cost of the EITC. Drawing on data from EITC expansions over the past three decades, Bastian and Jones find that “the EITC has a self-financing rate of 87 percent, so that the EITC’s true cost is only 13 percent of the sticker price,” which would make it “one of the least expensive anti-poverty programs in the U.S., costing taxpayers about half as much as the school lunch and breakfast programs.” Keep in mind that this is still a working paper, and there may yet be kinks to iron out. Further, it is not at all clear that future expansions would yield the same results. So one should take these findings with a grain of salt. Still, they are awfully encouraging to those of us who see wage subsidies as a valuable tool.