The EITC adds a lot of complexity to the tax forms of the working poor, who are often not well-positioned to cope with that complexity, nor to hire someone else to cope with it. About 20% of EITC payments go to those who don’t actually qualify, which seems to happen because low-income people hand over their tax forms to paid tax preparers who try to get them signed up. Of course, there’s another group, not well-measured as far as I know, of working-poor households who would be eligible for the EITC but don’t know how to sign up for it.
One of the advantages of a universal benefit is that you give the money to everyone. My idea is that you would then tax some of it back at a marginal rate of 20 or 25 percent. That is, for every dollar that someone earns in the market, they are lose 20 cents or 25 cents in universal benefits. Compared to a marginal tax rate of zero, 25 percent is more complex and has a disincentive. But it is much less complex and de-motivating than our current system of sharp cut-off points for benefits like food stamps and housing assistance. And having a non-zero tax rate allows you to have a higher basic benefit at lower overall budget cost.
Taylor seems to be naive. People know about the EITC. They know how to arrange their affairs to maximize the credit. A significant number of people misrepresent their affairs to tax preparers so that they can get the credit. A whole industry exists to generate EITC checks as soon as the paperwork is available to file electronically and to advance money to people who do not want to wait.
That’s an exaggeration. There are free tax clinics all over the country – I’ve worked at some – and the vast majority of these folks don’t have anything more than a simple W2 with standard deduction, and those without kids are eligible for the one-page 1040EZ. There is also FreeFile right on the IRS website.
Even with kids, it’s just a few extra numbers to put in on the regular form, and again, there are multiple easy ways to do this for free and there are usually no lines if you are willing to come in more than two weeks before the filing deadline. But of course, human nature being what it is … but let’s not chalk that up to an overly-complicated and expensive system and pretend that’s simply beyond the capacity of even a minimal amount of intelligence and diligence needed to acquire the earned income in the first place.
I think that much of the complexity could be eliminated by making income taxes individual. The higher earning parent could take the exemptions for the children.
As long as a universal benefit is less than the exemption level, there is no tax.
The Federal budget for 2015 was $3.9 T. Of that, 11% ($429 B) goes to Safety Net Programs (http://www.cbpp.org/research/policy-basics-where-do-our-federal-tax-dollars-go). That excludes Medicaid and CHIP.
Divide that by 320 million people and you have $1,340 per person per year (or $5,360 for a family of 4), if they have no market income. Seems thin.
If you include Medicaid and CHIP, you have a total of $780 B to use, or $2,440 per person, or $9,750 for a family of 4. That still seems thin, and now you have no programs targeted at people who are sick.
Total personal income in the US in 2012 was $13.4 T. A 20% tax on that raises $2.68 T. In fact, 42% of Federal tax revenue is from individual taxes, i.e., about $2.4 T. So, a flat 20% tax would raise the same revenues as the current income tax does.
Suppose you wanted a family of 4 who had NO market income to have a basic income at, say, the Federal poverty level of $6,063 per person (average per person for a household of 4), and you want to preserve Medicaid for people who are sick. Then you’d increase Federal spending by (6,063-1,340)*320 million = $1.5 T. That’s 11% of total personal income. So, you could do it, but the Federal income tax rate – before payroll taxes – would have to be 31%. With payroll taxes of 16.8% (counting the employer’s share) you’d have Federal withholding rates of 47.8%, although employees would only see it as 39.6%. Then there’s State income taxes to consider.
So, to make it work, the tax rates would be steep. But it’s not impossible. And it assumes poor people live in groups: the Federal poverty level for a person living alone is nearly twice as high.
A less-expensive alternative would be to use a lower fraction of the poverty level. Remember, sick people get Medicaid, so this would apply only to healthy children and healthy working-age adults not in the workforce. If you used 75% of the poverty level, the total Federal rates (including payroll taxes) would fall to 45.0% (true) / 36.8%, which are about the top rates you find in Europe these days. But, again, this means that a family of 4 with no working adult would live materially below the Federal poverty level.