Who's Afraid of Redistribution? An Analysis of the Earned Income Tax Credit

I. INTRODUCTION In the 2008 Presidential campaign, the American public was reminded time and again of the differences in the economic policies of the nominees: John McCain would cut taxes, (2) and Barack Obama would raise them, although only on those earning over $250,000. (3) In the final days of the campaign, the McCain camp accused Obama of proposing "redistribution," and the Obama camp quickly denied that description. (4) So why do presidential candidates run so quickly from the r-word? McCain's senior policy advisor equated redistribution with socialism, (5) but redistribution, in the form of the federal income tax system, is a central tenet of American democracy. Indeed, the very notion of having a tax system at all--in which amounts are collected from certain members of society in order to benefit other members--fits a classic definition of redistribution. One central element of the American version of redistribution comes in the form of the Earned Income Tax Credit (the "EITC"). In his campaign platform, Barack Obama vowed to expand the EITC, making it available to more taxpayers than ever before. (6) Given the outcome of the 2008 election, and President Obama's seeming commitment to the tenets of redistribution (despite his disavowal of the word) and his express promise to expand the reach of the EITC, as well as the recent changes to the EITC introduced by the American Recovery and Reinvestment Act of 2009 (the "ARRA") (7), it seems a perfect time to look at the intent behind, and accomplishments of, the EITC as it currently stands, and the role it can (and will) play in the future of the U.S. federal income tax system. I begin this article with a review of the history of the EITC and an examination of the form it currently takes. I then turn to a review of some of the difficulties presented by the EITC, and some recurring criticisms it has faced since its inception. In the context of this discussion, I also introduce responses to those criticisms, both within the framework of the EITC as it is currently administered and in the form of possible adjustments that might serve to improve the system. II. HISTORY OF THE EITC The EITC was instituted in response to the "Family Assistance Plan" ("FAP") proposed by President Richard Nixon in 1969, (8) which was itself an attempt to implement a version of a negative income tax in the U.S. income tax system. (9) Nixon intended the FAP to be "a new and drastically different approach to the way in which government cares for those in need." (10) The FAP was effectively a form of welfare, with the caveat that recipients would have to show that they were attempting to find work. (11) But even with this caveat, there was no requirement in the FAP that recipients be working or earning any income. (12) Under the plan, all families would be entitled to an annual income of $500 per person for the first two family members, with $300 for each additional family member. (13) In addition, the "work incentive" element of the plan allowed recipients to keep the first $720 of any earnings, plus half of any additional family income up to $4000, without losing FAP eligibility. (14) This proposal "would have established in law an unmistakably liberal principle: a federally guaranteed [minimum] income." (15) However, the political difficulty of these proposals proved insurmountable, and after passing the House, the FAP was defeated in the Senate. (16) Critics saw the plan as a work disincentive, in particular because the FAP's "guaranteed income" was joined with a high phase-out rate, so that each additional dollar of income earned by the FAP recipient resulted in a loss of 50 cents of FAP subsidy. (17) In response to Nixon's failed proposal, Senator Russell Long (D-LA) developed an alternative proposal incorporating a requirement that people who receive the credit work and earn income. Long, who was, at the time, chair of the Senate Finance Committee, led the campaign that resulted in the enactment of the EITC as part of the Tax Reduction Act of 1975. …