Papers

We discuss the potential role of universal basic incomes (UBIs) in advanced countries. A feature of advanced economies that distinguishes them from developing countries is the existence of well-developed, if often incomplete, safety nets. We develop a framework for describing transfer programs that is flexible enough to encompass most existing programs as well as UBIs, and we use this framework to compare various UBIs to the existing constellation of programs in the United States. A UBI would direct much larger shares of transfers to childless, nonelderly, nondisabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

The Earned Income Tax Credit (EITC) is a refundable tax credit that promotes work. Research has shown that it also reduces poverty and improves health and education outcomes. The maximum credit for families with two or fewer children has remained flat in inflation-adjusted terms since 1996. Over the same period, earnings prospects have stagnated or diminished for many Americans, and prime-age employment rates have fallen. This paper proposes to build on the successes of the EITC with a ten percent acrossthe-board increase in the federal credit. This expansion would provide a meaningful offset to stagnating real wages, encourage more people to enter employment, lift approximately 600,000 individuals out of poverty, and improve health and education outcomes for millions of children.

In this paper, we review the most prominent provision of the federal income tax code that targets low-income tax filers, the Earned Income Tax Credit (EITC), as well as the structurally similar Child Tax Credit (CTC). We frame the paper around what we see as the programs’ goals: distributional, promoting work, and limiting administrative and compliance costs. We review what is known about program impacts and distributional consequences under current law, drawing on simulations from the Tax Policy Center. We conclude that the EITC is quite successful in meeting its three goals. In contrast, most of the benefits of the CTC go to higher income households. In addition to analyzing current law, we assess possible reforms that would reach groups – for the EITC, those without children; for the CTC, those with very low earnings – who are largely missed under current policy.

The EITC is intended to encourage work. But EITC-induced increases in labor supply may drive wages down. I simulate the economic incidence of the EITC. In each scenario that I consider, a large portion of low-income single mothers’ EITC payments is captured by employers through reduced wages. Workers who are EITC ineligible also see wage declines. By contrast, a traditional Negative Income Tax (NIT) discourages work, and so induces large transfers from employers to their workers. With my preferred parameters, $1 in EITC spending increases after-tax incomes by $0.73, while $1 spent on the NIT yields $1.39. (JEL H22, H23, H24, H31, J22)