Can government successfully intervene to raise incomes and reduce poverty? It’s a heated but critical question. While social welfare programs, such as SNAP (food stamps) and Medicaid, help lift low-income families out of poverty, in some cases they can produce a disincentive to make more money–known as the “cliff effect“–in which a modest increase in income could mean an equal or greater decrease in welfare benefit. In other words, some families could be worse off financially if they accept a small raise at work.
This is obviously problematic, but what is the solution?
Future of Children author Gordon L. Berlin suggests expanding the Earned Income Tax Credit (EITC), which was created to increase work incentives among the poor by reducing the federal taxes they owe and refunding any leftover tax credit through yearly tax returns. For those filing taxes this year, the maximum EITC for a family with three children is approximately $6,000, while those without children can receive a maximum of approximately $500. As President Obama acknowledged in his 2014 State of the Union Address, “few [policies] are more effective at reducing inequality and helping families pull themselves up through hard work … but it doesn’t do enough for single workers who don’t have kids.”
Berlin’s policy recommendation addresses this concern. He argues for increasing the credit for all low-wage workers aged 21 to 54 who work full time–regardless of whether they have children or whether they are married, though the largest benefits would accrue to two-parent households in which both adults can work full-time. This policy would reduce poverty without distorting work incentives, as the earning supplement would progressively decrease with higher income. In effect, it could help transform a “cliff” into a steady slope of opportunity.
To learn more about this proposed policy, including how it could be paid for, see the Future of Children issue on The Next Generation of Anti-Poverty Strategies. We will return the topic of EITC expansion and how it can help children in our Spring 2014 Future of Children issue, “Helping Parents, Helping Children: Two-Generation Mechanisms.”