The case for a Working Family Tax Credit
And why it is a far better alternative to our current welfare state
I believe that the American welfare state is fundamentally flawed and has been so for the last 60 years. Social programs can be divided into two big categories:
Social insurance programs for retired people, such as Social Security and Medicare
Means-tested programs for the poor and near-poor, such as Medicaid, Food Stamps, CHIP, the ACA Health Insurance marketplace, public housing, etc.
This article only talks about means-tested programs for the poor and near-poor. The general purpose of these means-tested programs is to make the poor and near-poor more comfortable by substituting for all the things that a typical working-class person gets from a job:
an income in the form of TANF
food in the form of food stamps
housing in the form of public housing and
health care in the form of Medicaid and CHIP.
For those on the Left who want to give everyone a basic standard of living for all, this seems like a fair thing to do. But this is based upon a fundamental misunderstanding of how someone achieves a better life. The American welfare state tries to insulate the poor and near-poor from the negative consequences of not making the right choice.
I believe the main goals of government policy should be to:
Create a prosperous working class
Promote a clear pathway that enables youths from low-income families to enter the prosperous working class.
The welfare state should focus on the latter two goals, but it does not. What the welfare state should be doing is encouraging the poor and near poor to make Life Choices that enable them to acquire all the necessities for material life by interacting with the progress in the rest of American society.
In other words, we should offer positive incentives to make wise Life Choices rather than offering a safety net for those who do not. I believe that a modernized welfare state that promotes Upward Mobility should be based on:
A Working Family Tax Credit (explained in this article)
Upward Bound accounts based on the Pathway to Success that enable youths from low-income families to make wise Life Choices
Phasing out all current means-tested programs over four years.
Working Family Tax Credit
I believe that a Working Family Tax Credit is an essential part of my Upward Mobility reform proposal. This tax credit should replace virtually all current means-tested programs (not be in addition to current programs). In addition to long-term economic growth, the best means to promote a prosperous working class should be the Working Family Tax Credit.
The purpose of the Working Family Tax Credit is to:
Create a short-term positive incentive for parents with children to:
Get married and stay married
Get a full-time job and stay employed
Defer the substantial costs of raising children so that young families with children do not experience downward mobility
Establish a “living wage” for working families who make a reasonable effort to support themselves and their children.
Eligibility
My proposed Working Family Tax Credit would be a simple refundable tax credit for all families that are:
Married
With minor children
Work at least 35 hours/week combined
Have a total income of less than $110,000/year
Filed personal income taxes and some other rules to prevent fraud
It would be administered by the Internal Revenue Service like all other tax expenditures.
Fortunately, we already have a tax credit that is something like what I am proposing. The federal income tax has a Child Tax Credit of up to $2000 per child with up to $1500 being refundable even if the taxpayer owes no tax.
Amount
I propose a radical expansion of the current Child Tax Credit, changing its eligibility requirement, and rebranding it as the Working Family Tax Credit. The new credit would pay substantially more per child:
$12,000/year for the first child
$7000 for the second child (for a total of $19,000)
$2500 for the third child (for a total of $21,500)
Nothing for any additional children.
These numbers closely approximate the incremental cost for each child (see more details below). To ensure that the benefits primarily go to working-class families rather than professional-class families:
the full benefit will go to families that earn $15,000/year, and
the amount per child will gradually phase out so that families that earn $110,000/year or more will not be eligible.
The entire amount should be fully refundable.
For young families, the amount of the Working Family Tax Credit is substantial enough to offer strong financial incentives to work, get married, and stay married. It will also pay virtually 100% of the incremental costs of raising a child. Since the benefit is relatively small for the third child and the fourth child earns nothing, families will not have an incentive to have lots of children.
A living wage for the working class
The Working Family Tax Credit creates a true living wage for working-class families. Combining this with a four-year phase-out of our current means-tested programs will radically change the incentives for poor and working-class persons. Instead of the disincentives that our current programs give, they will not have strong material incentives to work full-time, get married, and have children. This is good for the individual, good for their future spouse, and good for their future children.
Combined with my proposed Upward Bound accounts (described in another article) based on the Pathway to Success, this will give youths from low-income families:
A strong economic incentive to invest in their own Upward Mobility
Funding to take steps that are proven to contribute to individual Upward Mobility
A minimum guaranteed standard of living if they take the proper steps.
While the purpose of this reform proposal is to promote Upward Mobility, it also has the benefit of saving hundreds of billions of federal tax dollars every year. If the proposal results in increased labor participation, then the savings will be even more.
See more articles on Upward Mobility:
Why Progress and Upward Mobility should be the goal, not Equality
The Pathway to Success (first article in three-part series)
The case for a Working Family Tax Credit (this article)
I also will be writing a significant number of excerpts from my forthcoming book: Upward Mobility: A Radical New Agenda to Uplift the Poor and Working Class. Most of these excerpts will only be available to paid subscribers.
Other books in my “From Poverty to Progress” book series:
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