Why the EITC Doesn't Make Work Pay

I INTRODUCTION Since 1975, the earned income tax credit (EITC) has transformed from a small, obscure provision of the federal tax code into one of the largest programs in the U.S. social-welfare system. Today, the EITC stands as the largest cash-transfer program for low-income workers with children, providing $47 billion in benefits each year to 24 million families.' Politicians, advocates, and scholars have praised the EITC. President Bill Clinton famously called the EITC "a cornerstone of our effort to reform the welfare system and make work pay." (2) Steve Holt of the Brookings Institution (among others) argues that the EITC "has proved remarkably successful in reducing poverty ..., [lifting] more children out of poverty than any other social program or category of programs." And, as often noted, support for the EITC spans the political spectrum. (4) Among its other attributes, the EITC is a political winner, as well: Congress has legislated major increases in funding while spending on other cash transfers has remained flat. Figures 1 and 2 illustrate the growth of the EITC as a percentage of GDP since 1975, alongside declines in federal spending on unemployment insurance and Temporary Assistance for Needy Families (TANF). [FIGURE 1 OMITTED] (5) [FIGURE 2 OMITTED] (6) The political history of the EITC--the story of how the credit came to occupy its current position in the U.S. social-welfare state--has been ably told by others. (7) In this article, I offer an evaluation of the significance of the credit and, in a historical spirit, hark back to an earlier, critical perspective on the EITC--a perspective rarely heard in recent years. The EITC arose from the ashes of the negative income tax in the mid-1970s. (8) From its earliest days, the EITC prospered politically because it appeared to promote and reward paid work--helping answer the charge that a negative income tax would support the idle. Still, remaining supporters of the negative income tax sounded a cautionary note: they worried that the EITC did too little to address poverty, unemployment, and eroding wages. (9) Here, I argue that these concerns remain apt, despite the expansion of the EITC and oft-repeated praise for its importance as an antipoverty program. My thesis is that the EITC--in anything like its present form--does not, and cannot, "make work pay," because it operates in a legal context that creates deep disadvantage for low-wage workers and their children. Like any good political slogan, "making work pay" is ambiguous: it has multiple meanings that appeal to different constituencies. (10) Here, I interpret the phrase in its distributive sense; I assume that the goal is to make a meaningful improvement in the wellbeing of low-income families and workers. Still, the phrase defies precise definition: "making work pay" might connote only an effort to improve incentives, that is, to induce individuals to work, whether or not their wellbeing improves by much. The same normative ambiguity pervaded the last decade's welfare reforms in the United States: some believed that work could improve the wellbeing of low-income families, while others supported work as a moral matter or as a means of reducing the welfare rolls. Obviously, if one takes the view that formal employment is the primary goal of the EITC program, and family wellbeing is irrelevant, the analysis here will be of no interest. Similarly, if one understands the EITC as aiming at nothing more than a reduction in the marginal and average tax rates facing low-income families, then its failure to make work pay (in the distributive sense) will not be troubling. The analysis here highlights three features of U.S. law that constrain the effectiveness of the EITC in improving the wellbeing of low-income workers and their children: labor and employment laws that structure markets that produce low wages and harsh working conditions, laws that condition access to primary goods on market earnings, and a social safety net with gaps through which low-income workers often fall. …