Transforming the EITC into an Acceptable Form of the Basic Income

Going back to the EITC in essence it works like a basic income for those in a certain threshold. So if we wanted to apply those benefits to all Americans how could we change the rules? The EITC has about 4 major parts an age restriction, a phase in based on income, a phase out based on income, and credit value that fluctuates based on household type.

The first step to include more Americans in the EITC would be to expand the eligible ages to all adults who aren’t receiving social security so from 25 to 64 to 18 to 64. This should be simple enough since even now there is bipartisan support for the expansion of the EITC from 25 to 21. An extra 3 years shouldn’t be difficult and even if it is covering those 21 and over is much better than where we are now.

Next, you would need to change the phase in to include virtually all eligible adults. The phase in is currently based on a combination of income and household status. Ignoring household status for now, how can you balance the freedom a basic income provides if you still have to work to get it and the lower the wages the more you have to work? First you would have to change from a phase in based on income to one based on equivalent hours.

What are equivalent hours? The simplest example is that if you work an hour at any wage each hour counts as 1 equivalent hour.

However, what if you are struggling to find a fulfilling job and would rather work for a charity. Than 1 hour served is equal to 1 equivalent hour of work.

What if you want to go to school? 1 credit hour consists of 1 hour classroom lecture or lab and 3 hours work outside of school per week. So for a 15 week semester with 4 hours of total work per week, 1 completed credit hour is equal to 60 equivalent hours.

However, what if you work off the books and don’t record your hours? Then you have to be able to show via a check or money order that you earned income. How much income? Since you have found income outside the system it needs to be valued at the same level as the EITC credit whose calculation I will get into below. At the risk of ruining the surprise since the EITC credit will be about $8,000 for a single filer, then you have to prove an income of $8,000 to get the full credit. The equivalent hours per $ would be the $8000 divided by the minimum amount of equivalent hours to get the full credit.

There would also probably be special rules for disability and possibly maternity leave, but for this exercise I’m ignoring that.

Next you would have to determine the phase out rules. For a basic income there wouldn’t be any phase out rules, but in the interest of cost savings and the progressiveness of the credit a phase out would be best. Higher income households would be encouraged to file separately for the lower earning spouse or members to earn the credit that way it would still be fair.

So where should it be phased out? Since the goal of this program would be to end poverty and support the middle class the average wage is the obvious starting point. So where would the phase out end? This question is more hypothetical so I’m just going to say at the lower limit of the top quintile.

Lastly, we need to determine the credit amount per household type. How much should single childless filers get? Filers with one child? Filers with two? Filers with more? Currently the max credits vary wildly based on the amount of children you have and are obviously more generous when you have more children. Taking our earlier example of making sure a household of 2 adults is above the poverty line we would need a single childless filer to have a max credit of $8,000. For filers with children instead of increasing the credit by number of children as it currently does, also using our earlier example we can give a fixed amount of money for any number of children that ensures a family of 3 with 1 child and 2 adults lives above the poverty line. So that number would be $3,100 in addition to the $8,000 per adult for a household with any number of children.

So now that we have the credit amounts how do determine the amount of equivalent hours a filer needs to earn to get the credit. In a nod to the fight for 15 setting the pay rate of credit to 210% of the minimum wage would equal $15.225/hr ($7.25/hr*210%). Dividing the max credit for an adult by the pay rate equals 525.45 hours. Rounding down to the nearest 50th hour would equal 500 equivalent hours.

500 equivalent hours equals 500 hours working at any wage, 500 hours serving an approved charity or performing community service or 9 credit hours (60 hours per credit * 9 hours = 540 hours).

There are approximately 200 million adults between 18-65 years old.

The 50% of the adults below the average income will take 100% of the credit. So 100 million people will use the full $8,000 credit. That will cost $800 billion. The remaining 60 million people (40 million are a part of the top quintile and will be completely phased out) will use about half of the credit on average for a total of $240 billion.  Assuming that the distribution of households with children is even amongst quintiles using our previous calculation of 37.125 households with children * $3,100 child credit = ~$200 billion * .80 = $160 billion. Now taking assuming only half of the people receive the full credit and the other half receive half the credit that would be $120 billion. Adding it all up the EITC would cost $960 billion.

Currently the EITC costs $56 billion that’s quite the jump. By eliminating the entire social safety net that saves $312 billion. Eliminating the child tax credit saves another $58 billion. However, at this point you hit a wall. Being generous with these savings the EITC still costs an additional $800 billion.

In order to save more money you would need to implement the same tax savings that you would for basic income which has the same problems getting past Congress.

Although expanding the EITC seems cheaper than a basic income, since you would have to keep social security that $888 billion expense makes brings the cost of social insurance to a little over $2 trillion which was the exact amount of our basic income from before.

So back to the drawing board. Giving a full basic income to 50% of the adult population cost $800 billion that’s still a huge number since the savings we get from dismantling the social safety net and the child tax credit would only be around $400 billion.

So how can we cut that in half? Well we could move the phase out to 200% of the poverty rate for a household of 2 and completely phase it out at the average wage. That would allow 40 million people to realize the full tax credit of $8,000 at a cost of $240 billion and 60 million people to realize approximately half of the credit which would be another $240 billion for a total of $480 billion. Furthermore we assume that lower portion has a proportionate number of households with children which would be about 7.5 million households with children each getting a $3,100 tax credit totaling $23 billion. For easy math we assume that the remaining people who get the credit get approximately the same credit we get about $50 billion rounding up for children. Adding up the $480 billion and the $50 billion child credit we get a $530 billion credit that the lower 50% would get a piece of. It would bring just about everyone living below the poverty line above it and be a nice supplement to lower middle class families. It would cost $130 billion more than the current social safety net and child tax credit and that could easily be funded by eliminating one or two of the tax expenditures which would be a much easier sell than eliminating the majority of them.

Although it isn’t a true basic income and only half the population would feel the immediate benefits it still achieves some of  the same goals.

 

 

Recommended Links

https://medium.com/basic-income/why-milton-friedman-supported-a-guaranteed-income-5-reasons-da6e628f6070#.50piu83xc

http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf

https://www.census.gov/prod/2014pubs/acsbr12-06.pdf

http://www.gallup.com/poll/188918/democrats-republicans-agree-four-top-issues-campaign.aspx

http://www.irp.wisc.edu/faqs/faq1.htm

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