Rewarding the Work of Individuals
A Counterintuitive Approach to Reducing Poverty and Strengthening Families
This article appeared in the September 2007 issue of The Future of Children, a publication of The Woodrow Wilson School of Public and International Affairs at Princeton University and the Brookings Institution.
Between the end of World War II and 1973, the share of Americans living in poverty fell by half. But since 1973 the overall poverty rate has remained largely unchanged. Why didn’t poverty continue to decline? Falling wages and increasing rates of lone parenting are the two principal explanations. Economic changes led to stagnant and declining wages at the bottom of the wage distribution, especially among men with a high school diploma or less, and demographic changes saw a near doubling of the fraction of all families with children that were headed by a single parent.
The problems of falling wages and single parenthood are intertwined. As the wages of men with a high school education or less began to tumble, the employment rates of these men also fell, and, in turn, the share who could support a family above the poverty line began to decline — and with it the professed willingness of low-income mothers and fathers to marry. Because the U.S. social welfare system is built around the needs of poor families with children — and largely excludes single adults who are poor (and disproportionately male) — it creates disincentives to work and marry for some, aggravating these larger trends. Although recent changes have reduced marriage penalties in the tax and transfer system, some do remain, particularly when both spouses in a married-couple family have similar earnings.
A strategy that used the federal Earned Income Tax Credit (EITC) to supplement the earnings of all low-wage workers aged 21 to 54 who work full time — whether they have children or not and whether they marry or not — would counter three decades of wage stagnation and persistent poverty, with significant positive corollary effects on employment and parental child support. By conditioning the benefit on full-time work, by targeting individuals regardless of their family status, by keeping the existing EITC for families with children in place, and by calculating EITC eligibility on the basis of individual income (as Canadians and Europeans do) rather than joint income for tax filing purposes, this earnings-based supplement would restore equity to the American social compact while minimizing the distortion of incentives to work, marry, and bear children.
Although it might seem counterintuitive to reduce poverty and strengthen families by rewarding individuals, focusing on individuals may have substantial advantages over traditional strategies to reduce poverty, especially given the underlying causes of poverty and the investments made to date in supporting families with children. This strategy rewards work in the formal economy, it reduces the disincentive to marry while restoring the incentive for parents to live (and parent) together, it creates social policy parity between poor men and women and between parents and childless individuals, and it helps noncustodial fathers in low-wage jobs meet their child support obligations. Importantly, the largest benefits would accrue to two-parent households when both adults can work full time. Some 21 million low-wage married individuals and another 16 million single individuals would receive an EITC payment under this plan.
The annual cost of this policy, estimated to be between $29 billion and $33 billion, is equal to 4 percent of the $750 billion in extra income received each year by the top 10 percent of earners as a result of the pronounced shift in the nation’s income distribution that has occurred since 1975 — or about one-third of the annual tax reduction for the top 1 percent of the income distribution as a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003. A prudent next step would be to rigorously evaluate a limited demonstration of this idea to determine if the benefits in increased work effort, marriage rates, and child support payments — as well as reduced criminal activity and poverty among low-income men and their families — exceed the costs.