Oren Cass ran domestic policy for Mitt Romney's 2012 campaign — and has a serious, developed proposal to help the working poor.
Cass, now a senior fellow at the Manhattan Institute, on Tuesday published a plan to replace the Earned Income Tax Credit — the big tax break the federal government uses to support the working poor — with a wage subsidy. That would, according to him, help childless workers who are currently left out of the safety net, discourage work less than traditional social programs, and provide low-income families with more regular financial support. It's the best response conservatives have produced yet to Fight for $15 and other left-wing movements to boost pay for working people.
Cass obviously doesn't speak for every Republican. But he speaks for a lot of them, particularly elites in Congress. His previous big idea on anti-poverty policy — consolidating the budgets of food stamps, welfare, Medicaid, and other federal programs into "flex funds" given to states — has already been embraced by Marco Rubio and Paul Ryan, and Rubio has expressed support for the idea detailed in the Manhattan proposal as well.
So it's worth paying attention to Cass's latest idea, too, as Republican candidates will no doubt do the same.
The big idea: Have the government boost paychecks for the working poor
Cass's big idea is to replace the Earned Income Tax Credit — the big tax break the federal government uses to support the working poor — with a wage subsidy. The difference between the two ideas is subtle, but important. The EITC is paid in a lump sum as part of tax refunds every spring; it's calculated as a function of a household's total earnings throughout the previous year, and is primarily geared toward families with children, offering little to childless workers. Wage subsidies would be paid to individual workers, not to households, and through their regular paychecks as opposed to one big check every year; and, because the subsidy is administered on the individual level, it'd offer just as much to childless workers as to workers with families.
Here's how it would work. The government would set a target hourly wage; this could either be the same everywhere, or vary locally based on state and local labor market conditions. One option Cass floats would be to set the target wage at 60 percent of the median wage in an area. So if the average worker in a region is making $20 an hour ($40,000 a year if working full-time), then the target wage would be $12. The government would then commit to paying half the difference between an employee's market wage and the target wage. For example, imagine the target wage is $12, and an employer is paying a worker $8 an hour — $2 is half the difference, so the government would add $2 an hour to the employee's paycheck. Once an employee is making the target wage, government support ceases, which keeps costs under control.
The case that wage subsidies are better than the EITC
This, according to Cass, has a number of benefits over the EITC. For one thing, it provides much more support for childless poor people. For another, it would, Cass contends, reduce the error rate associated with the EITC. Wage subsidies also provide more immediate benefit to the poor, because they're paid biweekly (or however often a worker receives paychecks) rather than annually. EITC supporters tend to dispute this, and say that the annual lump sum payment acts as a form of forced savings, which is valuable for poor people. Cass disagrees. He cites a sociological study in which researchers interviewed EITC recipients and found that "the first thing participants usually mentioned was the palpable relief they felt when they could finally make progress paying down debts and catching up on bills." Paying wage subsidies regularly could lower the size of those debts to begin with, Cass reasons, and is probably preferable to people waiting for one big payment and then using it to pay them off.
But the big benefit, he claims, is that the plan would reduce work disincentives. Social programs that phase out discourage people from working, according to standard economic theory. If each dollar I earn from work reduces the amount of support I get from the government by, say, 50 cents, then that limits the benefits of working more. Both wage subsidies and the EITC phase out as people make more money — but how they phase out differs greatly.
"The real distinction between the EITC and the wage subsidy is that the EITC phases out as your income increases, and the wage subsidy phases out as your wage rate increases," Cass tells me. So if you are working a job that makes $8 an hour and decide to increase your hours from 30 a week to 40, your government support wouldn't decline at all under a wage subsidy, since your hourly wage wouldn't increase, but it would decline under the EITC, since your overall income would grow.
That matters, Cass contends, because people have more control over the hours they can work than over their hourly pay: "You don't have to worry nearly as much about the incentive. The personal cost to getting a raise is not the same as the personal cost of working another hour."
The case that the EITC is better than wage subsidies
I sent Cass's proposal to the liberal poverty policy experts at the Center on Budget and Policy Priorities to gauge their reaction. They weren't horrified — but they weren't exactly thrilled either. "EITC has been around for decades, and it's extremely successful," Chuck Marr, the center's director of federal tax policy, said. "When something works, to change it in a fundamental way you have to meet a very high threshold. … It doesn't come close to meeting that threshold."
The basic issue, he argued, is targeting. The EITC is targeted by income, rather than by wage rates, which means that it goes specifically to families that aren't making much overall. A wage subsidy would also benefit, say, a teenager from a comfortably middle-class family working a minimum wage job on the weekends. But it wouldn't benefit a low-income family where the breadwinner makes $12 an hour but can't get her employer to give her enough hours. And because the wage subsidy doesn't increase based on the number of children in the households, it would quite possibly offer less than the EITC to large families.
This could be mitigated to a degree by increasing the Child Tax Credit, as many conservatives have also advocated. But that does away with another claimed benefit of wage subsidies: the potential for lower error rates than exist with the EITC. EITC error, Marr explained, boils down to a) disputes over which parent gets to claim a dependent for tax purposes, and b) issues in calculating self-employment income. The first factor has the effect of making EITC error look worse than it is; after all, if one parent is overpaid, then there's another parent being underpaid. But in any case, it's an issue with the Child Tax Credit as much as with the EITC. And if self-employed people are to receive wage subsidies, then the program would face the same errors the EITC does.
Jared Bernstein, a senior fellow at CBPP and former chief economist to Vice President Joe Biden, also disputed Cass's incentives argument, that it's more important to reduce the incentive to work more. "We’re not sure why the EITC tax rate in the income phaseout range — around 20% for families with two or more kids — is worse than the 50% tax rate on wage increases of subsidized workers," he and CBPP research assistant Ben Spielberg wrote in an email. "Why is the disincentive on the hours margin worse than the larger one on the wage margin?"
The CBPP team is also generally skeptical that work disincentives are a big deal. "As I read the research on the EITC, it’s had a significant, positive labor supply impact on the extensive margin (to work or not) and little on the intensive margin (how much to work)," Bernstein writes, "suggesting that tax rate on the down slope, while theoretically a problem, is not one that generates much of the predicted response."
Finally, CBPP's experts note that there's a simpler way to extend benefits to childless workers: Just expand the EITC to include them. This is a simple policy that both Paul Ryan and Barack Obama have embraced, though disagreements about how to pay for it have kept it from becoming law.