EITC for All: A Universal Basic Income Compromise Proposal

1. EITC for All: A Universal Basic Income Compromise Proposal Benjamin M. Leff National Tax Association Annual Meeting November 9, 2017

2. Goals of this paper • Disaggregate “policy components” of a Universal Basic Income proposal (explaining UBI); • Root policy discussion in real existing policy (explaining EITC); • Avoid discussions of (i) the future of labor, and (ii) work conditionality • Maybe make some basic points about simplicity and tax/transfer policy

3. What is a Universal Basic Income (“UBI”)? A UBI is (1) A regular cash income (2) paid to all on an individual basis (3) without means test (4) or work requirement. (i) No work requirement means that there is no differentiation between recipients who work or are willing to work and those who simply choose not to work. It raises issues both about justice and incentives.

4. What is a Universal Basic Income (“UBI”)? (ii) No means test means that you do not lose eligibility for the benefit because of income, either as a cliff or as a phaseout. This increases the amount of the benefit that must be funded by some explicit mechanism (like taxation), but doesn’t tell us how that happens. System 1: $10,000 benefit; phases out from $10,000 to $50,000 25%; 25% tax on all income over $10,000. Equivalent of a 50% tax on all income between 10,000 and 50,000 and thereafter a 25% tax. System 2: $10,000 benefit; doesn’t phase out; 35% tax on all income over $10,000.

5. What is a Universal Basic Income (“UBI”)? (iii) “Paid to all on an individual basis” means that all adults receive the same benefit regardless of family status. So, the benefit is the same for people who are married or unmarried and people who co-habitate or not. It is also the same for people with children or without, although children may receive their own benefit that might be remitted to an adult for use on the child’s behalf. Also, a broad class of people who receive benefits under some other program may be excluded (like elderly who receive social security).

6. What is a Universal Basic Income (“UBI”)? (iv) “A regular cash income” means both that the benefit is paid regularly, ideally at least every month, although an annual basic income is possible, and that it is not paid “in kind” (in the form of medical services, food, education, or housing, for example). It does not mean that it must be paid in physical cash as opposed to loaded on some kind of debit card or other electronic payment method.

7. What is the EITC? The EITC is (1) an annual refundable credit, (2) paid to qualifying taxpayers based on family status, (3) which phases out as income rises above a threshold amount, (4) and phases in as income rises below a threshold amount. (i) “phases in” means that the EITC has a work requirement. A person who earns no money in the market economy receives no benefit, regardless of whether they have a “good reason” not to work and regardless of whether they are “seeking” work. The credit grows as market income grows up to a cap, at which point the recipient has received the maximum credit.

8. What is the EITC? (ii) “phased out” means that the benefit is “means tested” because after the recipient has earned a certain amount of income, the benefit is reduced by a percentage of each dollar earned over a threshold until the recipient earns enough income that they receive no benefit. This functions as an additional marginal tax rate on income between two thresholds. This additional marginal tax rate may be compounded by the overlapping phaseout of other uncoordinated benefit programs.

9. What is the EITC? (iii) “based on family status” means that • the income of married persons is aggregated for the purpose of calculating qualification for the benefit (although the phaseout schedule is different for married taxpayers); • an adult’s benefit is dramatically larger if they are the custodial parent of children, with the benefit for the first two children being substantial, the additional benefit for the third child being relatively small, and no additional benefit for any child after three; and • the parent to whom a child is attributed is the higher-earning parent who resides with the child for at least half of the year, which means that an adult’s benefit may depend on whether they co-habitate with their children’s other parent.

10. What is the EITC? (iv) “an annual refundable credit” means that the benefit is paid through the income tax system at the time a taxpayer files their tax return, which is in April of the year following the year in which they qualify for benefits. The credit is first applied to any tax liability that the beneficiary owes, and then any remaining amount is paid in a lump sum (or can be applied to the recipient’s next year tax liability). That means that the benefit is potentially mismatched with the time of highest need. Although there are some studies that suggest that this temporal mismatch is beneficial, at least for some taxpayers.

11. EITC Illustrative Example Michael Jones (no custody of his three children) .08/$1 up to $6610 (912 hours at 7.25/hr); Max Credit $506 phaseout starts at $8,270 (1140 hrs); no credit at $14,880 (2052) Ashley Smith and her three children .45/$1 up to $13,930 (1921 hrs); Max Credit $6,269 phaseout starts at $18,190; no credit at $47,955

12. EITC Reform Proposals NOT removing the work requirement (even though I believe that a work-conditional program is more problematic than it is worth).

13. EITC Reform Proposals • Removing the Phaseout. Point: Distributional analysis depends on how the phaseout is funded, but even a proportional (flat) income tax is significantly progressive as compared to current law. Thumbnail Revenue Estimate: 2% on all income

14. EITC Reform Proposals (2) Removing the Family Conditions (a) Marriage and co-habitation don’t matter. Notice how removing the phaseout makes this much more possible. (b) Number of children don’t matter (although children get their own benefit that is paid to an adult on their behalf). The default could be parental choice over which parent receives the child benefit. Again, notice how removal of the phaseout makes this more possible. Example Proposed Benefit: $506/adult; 2,867/child [thumbnail 2.4%] 2nd Proposed: $3,600/adult; 1,000/child [thumbnail 7%]

15. EITC Reform Proposals (3) Pay in monthly disbursements. Receive a year of payments without a need to show labor income. Thereafter, payments are based on prior year income, but can be updated with real-time payroll information or other evidence of income. Again, notice how the removal of the phaseout makes this solution more possible. Proposal: phasein at 50% means maximum credit of $3,600 per adult at $7,200 of income (993 hours at minimum wage). [no thumbnail]

16. Revenue and Distributional Analysis Full Proposal: $10,000/adult; $2,000/child; replace tax code with all-in-flat tax. • Revenue Estimates from “All-In Flat Income Tax” [Under construction] • Distributional Analysis from “All-In Flat Income Tax” plus Reformed EITC. [Under constriction]