France's Debt Is Bad Enough Where the EU Is Chiding France

I don't exactly have the highest threshold of dealing with government's fiscal irresponsibility, but for whatever reason, France seems to grab my attention. Is it as bad as Greece? No. But still, France does a bang-up job. Although France has a history of having a solid credit rating, its credit rating downgrades (most recently from Standard and Poor's) signals that something is amiss. Economic trends must be pointing in an even more downward direction if I end up reading in the Financial Times earlier this week how France is in violation of European Union budget rules because France cannot keep its budget deficits below 3 percent (Ministères de Finances et de l'Économie, 2014, p. 17). The French government is now in a quandary of figuring out how it can reduce its budget deficits without greatly agitating its citizenry. It might be tempting to blame this on the recession. After all, it is why these budgetary rules were implemented in the first place. Looking at France's GDP growth in recent years shows that its tepid GDP growth was an issue even before the recession.

What France needs to do to deal with debt sustainability in the medium-to-long run versus what they will do to keep the European Union placated will be two different things. This is not simply a matter of politicians, regardless of the country, who like to delay major fiscal reform as much as possible. France was the country that had its laborers strike in an uproar a few years back because the government was going to raise the age for retirement benefits from 60 to 62 years. What's more is that GDP projections back in 2012 were a lot more rosy than the current situation (Ministères de Finances et de l'Économie, 2012, p. 3). I expect a minimalist compliance with the European Union so that the bureaucrats get off France's case. As to what they should do, that's a whole different story.

I found a report by Balázs Égert over at the Organization of Economic Cooperation and Development (OECD) covering the topic of how France should reduce its debt. For those who know, the OECD is hardly a bastion of laissez-faire thought. Even so, I was surprised at how much they were concerned about France's unsustainable debt to the point where they were suggesting forms of fiscal consolidation. The major suggestions for public debt consolidation were in the arenas of the public pension system and the health care system, which is no surprise because they tend to be major drivers of federal budgets. The French government also has a reputation of being very liberal with worker benefits, which means that if France has an aging population issue (like the OECD report states), then the French government is going to need to reform labor laws so that benefits are not so generous, and so that French citizens are incentivized to work more hours and retire at a later time.

There is also the matter of dealing with France's tax rates, which are high. Although François Hollande recently claimed to be a supply-sider, I worry because France suffers under a delusion, a delusion in which one puts faith in what the people over at the American Enterprise Institute facetiously call the Krugman Curve, or the idea that an increase in the marginal tax rate translates into more tax revenue. If that were the case, the French government would have an enormous tax base because France's propensity to tax is staggering. France has one of the highest rates of tax revenue as a percentage of GDP in the European Union, as well as one of the highest rates of government spending as a percentage of GDP, both of which are problematic because it signals that France has to rely on its tax base and aggrandized government to drive the GDP (Hint: That's not how you get real economic productivity).

Without the conversation being too tangential (since we can delve into each sector and go into detail as to specifically what France can do to reduce its deficits), I suppose the point of the article is that if France is going to seriously reform its economy, it needs to tackle the more systemic issues. Its rates of taxation are too large, as is the state, neither of which can maintain solvency in the long-run. Anything short of market liberalization and cutting the excessively lavish social-welfare programs will only perpetuate France's debt sustainability issues.

Yes, the Fight for Same-Sex Marriage Is Very Similar to the Fight for Interracial Marriage

It looks like this is the second time this week I will be taking the Heritage Foundation to task for shabby analysis (here is the first). A week ago, Ryan T. Anderson at the Heritage Foundation wrote an article entitled Is Opposition to Same-Sex Marriage at All Like Opposition to Interracial Marriage? No., and it reminds me once again that when the Heritage Foundation tries to analyze social issues, it is way off. The author starts by saying that allowing for same-sex marriage is a violation of religious liberty. He then continues by saying "marriage has been and continues to be between one man and one woman." Finally, he ironically argues that although Jim Crow laws and bans on interracial marriage were based on prejudice, the argument for opposition to same-sex marriage is based on reason. I am going to respond to the author point-by-point and illustrate once again why secular opposition to same-sex marriage doesn't have a leg to stand on.

Definition of Marriage
Although this was not addressed first in the article, my comments on this question are prefatory to replying to this sorry excuse of an analysis. Opposition to same-sex marriage is based on the idea that marriage has historically been between one man and one woman, and has been unchanging. In spite of what the opposition has to say on the matter, the definition of marriage has changed multiple times throughout history to adapt to evolving social and cultural norms. In pre-modern times, marriage was arranged by the parents as a way to improve upon one's social status. Women were essentially treated like the husband's property. It is no wonder that one could not marry outside of one's socio-economic status, religion, or race. The idea of marrying someone out of love is a relatively recent concept. There was also a time when it was acceptable for a man to marry a twelve-year old girl, and none of this counts all of the polygamy that existed outside of Western civilization. Even the Bible itself doesn't hold to the one man/one woman definition of marriage (see below). The argument that "marriage has always been between one man and woman" is simply false. Even if it were true, it is still falls under the logical fallacy of argumentum ad antiquitatem because the fact that something has been done for many years has no bearing on whether it is correct. Like any other institution, marriage can adapt and evolve for the better. In its simplest terms, marriage is a contract between consenting individuals that want to develop a committed relationship. Being able to legally sign such a contract is not only a civil right, but is one of the most basic of economic rights that exists.

Is Allowing Same-Sex Marriage a Violation of Religious Beliefs?
I have to answer this question with a resounding "NO!" I tackled the issue of the violation of religious beliefs a year ago, and the Heritage Foundation's argument does not apply here. The author mentions allowing businesses to run their business in accordance with the belief that marriage is between one man and one woman. This argument is inaccurate because whether a baker is forced to bake a cake for a same-sex wedding is a separate issue from whether two consenting adults of the same sex are allowed to marry each other. One has the right to believe that same-sex marriage is against the Bible, but no one has the right to impose that right on society. Doing so would be a violation of the First Amendment. If you do not like same-sex marriage, don't get married to someone of the same sex!

Is Opposition to Same-Sex Marriage Based on Reason, and Not on Prejudice? 
This is another question I have to answer with a resounding "NO!" The last thing upon which the opposition to same-sex marriage is based is reason because there is no logical argument against same-sex marriage (see here, here, here, and here). The author argues that "the bans on interracial marriage and Jim Crow laws, by contrast, were aspects of a much larger insidious movement that denied the fundamental equality and dignity of all human beings and forcibly segregated citizens." This is the author's attempt to try to make interracial marriage and same-sex marriage as dissimilar as possible. One of the differences between the two is that one can hide their sexuality, but one really cannot hide the color of their skin. If homosexuals had some distinguishing mark on them, it would be reasonable to assume that they would have undergone a segregation similar to those subjugated under Jim Crow laws.

The author's implication that homosexual individuals do not experience discrimination or that are not deprived of their fundamental equality and dignity is as egregious as it is ignorant. For one, homosexual individuals still have to deal with workplace discrimination. In terms of hate crimes, LGBT individuals are still high on the list of being victimized (see FBI Hate Crime data). LGBT youth make up for forty percent of those living out on the streets. Homosexual individuals in most states cannot adopt children. Although there has been progress made in terms of LGBT rights, most notably in terms of the right for same sex-marriage, there is still a lot of progress that needs to be made before the [legalized] prejudice against homosexual individuals stops.

Why The Fight For Same-Sex Marriage Is Similar to That of Interracial Marriage
There are many similarities between the fights between these two civil rights, one of them being that the Religious Right used the Bible to justify their views on both. With interracial marriage, it was twisting the verses about interfaith marriage, amongst other verses, to justify their bigotry. Now they're erroneously using Leviticus 18:22 to advance their agenda. For either one, opponents use the argument that this sort of union was unprecedented, abominable, unnatural, will destroy society and "traditional marriage," and will end up being a slippery slope to polygamy and incest. Also, there is that fun argument of "Oh, gay people can just marry people of the opposite sex" is very similar to "Oh, people are allowed to still marry, as long as it's within their own race." Rather than being dissimilar scenarios, the arguments that were used against interracial marriage mirror those that are currently used against same-sex marriage (see Loving v. Virginia as a legalistic example).

The fight for interracial marriage was not only won based on the idea that the color of one's skin is only skin deep, but the idea that at the end of the day, we're all human and we are all looking for love, companionship, and a deep commitment with someone, all of which are essential components of a marriage. I hope there is a day where the vast majority of Americans realize that much like individuals of color, homosexual individuals are human beings like anyone else, and as such, should be afforded the same opportunity to experience life, liberty, and the pursuit of happiness.

Stop-And Frisk Is Touch and Go At Best: Why Put a Stop to Stop-And-Frisk?

A few days ago, I was reading a short opinion piece by the Right-leaning Heritage Foundation entitled "Is Stop-and-Frisk Worth It?" In the article, the author justified the practice by saying that the practice of stop-and-frisk is useful and is not inherently bigoted. The article is concluded with ways to make the practice less oppressive. The history of stop-and-frisk goes back to 1968 when the Supreme Court ruled in Terry v. Ohio that stop-and-frisk practices are constitutional. In 1971, New York passed Criminal Procedure §140.50, which allowed for stop-and-frisk practices. Although the practice has been legal for a few decades, the NYPD started implementing it en masse in the early 2000s. Ever since, this issue has been contentious, and given the issues with civil liberties in the stop-and-frisk practice, I have to wonder whether we should continue giving police officers the ability to stop and frisk pedestrians for weapons or contraband if the officer has "reasonable cause."

Does stop-and-frisk work?
Although I will address issues of civil liberties later, the first question I have to wonder is whether the practice of stop-and-frisk decreases crime. The study that gets closest to showing that is the study of Rosenfeld and Fornango (2011). Even they found "very few significant effects (p. 2)," and that was without considering that a longer time lag between the rate of stops and the crime rate would nullify the effects. The New York State Office of the Attorney General (OAG) published an interesting report back in 2013. For one, the arrest rate with stop-and-frisk is really low (OAG, Appendix G).

The number of stops does not translate into fewer felonies. Stop-and-frisk is not proven to lower the crime rate, whereas such factors as increased number of police officers, an increased prison population, the receding crack epidemic, and the legalization of abortion better help explain the decrease in crime (Levitt, 2004). Even possibilities such a hot spot policing (Braga, 2005) or decrease in lead paint provide more plausible explanations than stop-and-frisk. Essentially, stop-and-frisk has no real effect on the crime rates (Greenberg, 2014).

The decrease in crime that took place in the 1990s took place before the vast increase in stops during the 2000s, which would mean no causal link. As a further indication of failure, only 0.1 percent of all stops lead to weapons confiscated (OAG, p. 1), and merely 0.1 percent of all stops led to a conviction (ibid).

Is stop-and-frisk racist?
Stop-and-frisk itself is not racist unto itself because the mechanism does not target members of certain racial or ethnic background. The issue, however, is the manipulation of using stop-and-frisk as a pretext for racism, much like we saw with Arizona's immigration law a couple years back. Some think that stop-and-frisk actually protects minorities, and thus alleges that it stops crime in predominantly Latino and African-American neighborhoods. However, that does not seem to be the case. During the case of Floyd v. City of New York, Dr. Jeffrey Fagan, an expert in criminology, provided testimony that shows that even when controlled for the crime rate, there is still a racial disparity. Even the NYPD Quarterly Reports show that blacks and Hispanics are disproportionately stopped and frisked. Almost half of New York consists of black and Hispanic citizens. Even so, nearly 90 percent of the stops were of black and Hispanic individuals, although black people were twice as less likely to have a weapon than a white person (Office of the Public Advocate, p. 3). I know that correlation is not causation, but still, to claim this as mere coincidence is tenuous as best.

Constitutionality and Violation of Civil Rights
Being ineffective and quite possibly racist are already troubling enough aspects of stop-and-frisk. There is also the issue of the violation of one's rights. First and foremost, there is the issue of the Fourth Amendment, which was brought up in Floyd v. City of New York. The Fourth Amendment doesn't prohibit any search or seizure, but rather it prohibits unreasonable searches and seizures. Going back to the data, there were 2.4 million stops conducted from 2009 to 2012 alone (OAG, p. 8). However, six percent of stops led to arrests, and only 0.1 percent led to conviction (OAG, p. 1). If reasonable suspicion was the primary reason for allowing the searches, wouldn't a low arrest rate and conviction rate undermine the justification for stop-and-frisk? Since the vast majority of stop-and-frisk encounters are that of innocent citizens, one cannot argue "reasonable search and seizure" with a straight face. And as the previous section on racism shows, there are also issues with violating the Fourteenth Amendment.

Conclusion
This "tough on crime" policy harkens back to the 1970s when New York City had astronomically high rates of crime. Maintaining such a mentality while holding onto an ineffective policy does not do any favors for the citizens of New York City. Stop-and-frisk also erodes trust in the police (see Vera Institute of Justice study here) and increases labor costs of law enforcement who waste time on such inefficiencies. If we're going to talk about reducing crime, let's do away with the War on Drugs so that police resources can be allocated to fighting real crime. We should also discuss policy alternatives to fighting crime, but let's discuss options that actually work and don't erode our constitutional rights in the process.

Implementing Common Core as K-12 Education Reform Defies Common Sense

A lot of ruckus has recently been made around a series of educational standards known as Common Core. Indiana scrapped Common Core standards a couple of weeks ago, and other states very well might follow suit. Some Common Core math questions (see here and here) have garnered attention because of their ridiculousness. A mother in Sacramento was suspended by the Sacramento school district because she disagreed with Common Core standards. What is it about Common Core that is causing such annoyance?

Common Core is a an education initiative dealing with curriculum standards, uniform testing requirements, and teacher training promoted by the National Governors Association, as well as the Obama administration, that have been adopted by 45 states to improve upon academic achievement. The finalized standards were released in 2010, but have only recently begun the implementation stage. Much like with the overhaul of healthcare with Obamacare, I find that Common Core is trying to tackle too much at once. It's no wonder that the head of the National Educators Association, the largest teacher's union in the country, has labeled the beginnings of Common Core as a "botched implementation." Good things can have a rocky start, and I'm not one who is opposed to having standards in our education system. Children should know how to read and do arithmetic. Even with that being said, I still think that Common Core standards are not going to work. Why?

Standards might be a series of expectations, but the purpose of these standards is to drive curriculum (e.g., federal funding tied to standards). Although children require certain skills and knowledge to succeed in the world, the truth is that each child learns differently. A top-down approach for something as individualized as one's learning is tomfoolery. If states are "laboratories of democracy," then the standards and implementation thereof should be done on as localized of a level as possible.

There is no meaningful empirical evidence that national curriculum standards lead to superior educational quality. Tom Loveless, an education expert at the centrist Brookings Institution, points out in a recent progress report that Common Core standards are not projected to have any significant impact on student performance. Are children really that homogenous that a single set of standards works? Is the federal government so omniscient where it would know how to implement a one-size-fits-all solution? Teachers and parents, the very people who most are involved in the child's education, should have the most say, not some bureaucratic entity in Washington D.C. Teachers and parents need the adaptability to provide educational success to their children, and not be tied down to a static list of standards.

More to the point, this would not be the first time that the federal government has attempted to standardize education in such a manner. Head Start, which is the government's attempt to control pre-K education, has been a failure. No Child Left Behind also managed to leave many children behind, hence the reason why the government is giving it another go with Common Core.

I am worried about other factors concerning Common Core, such as the rendering of textbooks obsolete that will cause an expensive overhaul, teachers who will leave the field because they will feel too constrained by Common Core standards or will not be able to keep up with the standards, online testing that would trigger an overhaul in technology, an overvaluing of standardized tests that will lead teachers to "teach the standardized tests" instead of teaching children how to learn, the latter of which is hard to teach if children are being forced into homogeneous thinking.

If we want to compare children's academic abilities across state borders, we already have the ACT, SAT, GRE, and advanced placement examinations. If there is an issue with standardized testing, we should modify what's already in existence and not have the federal government intervene. Common Core is, at best, a distraction from what America needs to do to improve its quality of education. Adopting standards is no substitute for actually dealing with the woes of our school system. If we are serious about education reform, we should discuss different policy alternatives, such as expanding school choice and improving upon teacher evaluations. Until we seriously entertain the merits of policies that can actually work, bureaucrats at Washington are diluting themselves if they think federally-induced standards are going to make American children more educated.

Why Robert Reich's Seven Reasons for a $15 Minimum Wage Are Rubbish

Minimum wage has become a hot-button topic these days. Senator Harry Reid is trying to enact a $10.10 minimum wage because he thinks that $10.10 is the right amount to help people escape from poverty. Some individuals, such as the fast food workers who were protesting a few months ago, erroneously believe that a $15 minimum wage would be appropriate. Former U.S. Secretary of Labor Robert Reich happens to be one of those individuals. He recently came out with a concise video (see below) as to why he believes the minimum wage should be raised to $15 per hour. For me, it does not matter whether a bad idea originates from an uneducated layman or a former Harvard professor with a background in economics because a bad idea is still a bad idea. Let me list Reich's seven reasons and where he goes wrong in his video......

1. The adjusted minimum wage from 1968 is $15/hour. Reich argues that when both inflation and productivity are factored into the equation, minimum wage should come out to $15 per hour. This assumes that the minimum wage was set at the "right amount" back in the late sixties, and that minimum wage is actually an effective tool against poverty. When adjusted for inflation alone, there is some deviation, but not as much as Reich would hope for. Even if you want to make the productivity argument, what do you think was the cause of the productivity gains over the past few decades: a spike in work ethic or the technological advances made?  
2. $10.10 is not enough to lift people out of poverty. I can go in many directions with addressing this fallacy. The main counterpoint I will make here, much like I did in my recent discussion on the Earned Income Tax Credit (EITC), is that minimum wage targets low-income workers, not low-income households. To Reich's dismay, the overlap between low-income workers and low-income households is nowhere near 100% because many minimum wage workers live in households with those earning well above minimum wage. If you want to fight poverty, try something else.
3. We subsidize low-wage workers in form of the welfare system. Two points I would like to bring up here. The first is that we don't need to have a welfare system. Reich brings up the fact that we subsidize the poor in the form of Medicaid, food stamps, and housing subsidies. If the welfare system is that burdensome, we should talk about doing something to scale that back instead. Second, the government declared a War on Poverty back in the Johnson administration. How well has that been working out? Do we honestly think that raising the minimum wage to $15 is going to decrease the aggrandizement of the federal government's scope? Going back to Point #2, raising the minimum wage by more than double is not going to solve the problem.
4. Increased minimum wage = more jobs. Reich either neglected to read or decided to ignore the Congressional Budget Office's recent report on the effects of minimum wage. That would be the report that said that a $10.10 minimum wage would put around 500,000 employers out of work. Consider that is the net loss in employment for a minimum wage increase to $10.10. Think of the magnitude if that were $15! The minimum wage is a price floor above equilibrium point, and the fact that Reich forgets that basic economic concept, not to mention the "law of demand," says a lot right there.
5. Wage increases are more likely to come out of profits, not prices. There is more than one way to skin a cat, and absorbing the costs of a minimum wage hike are no exception. Aside from taking the costs from price increases from the product or from profits, an employer can also lay off minimum wage workers, decrease worker benefits, reduce worker hours, or depending on the industry, the employer can find automated technologies to replace some or all of worker responsibilities and duties. What Reich neglects is that most businesses are for-profit, which means that they entered the industry to make a profit. While profit motive is not the only reason for working, it certainly cannot be ignored as having potent predictive power. Even non-for-profit organizations need to keep afloat. Labor is a cost of doing business, and the burden of minimum wage is squarely imposed on the employer. The typical business owner would increase prices or lay off laborers before they would consider a substantial decrease in profits. 
6. Politics means that we need to ask for what's right now. Not only do I vehemently disagree with Reich's proposal for a $15 minimum wage, but he does not have a good grasp of political feasibility if he is making this comment. The House of Representatives has a Republican majority, and even the Democrats pushing for a minimum wage increase don't want to be excessive, hence why they want a $10.10 minimum wage. Simply put, asking for a $15 minimum wage is politically infeasible. 
7. It's not just smart, it's right. Is it right to make it more difficult for employers to hire young and low-skilled workers so that they can acquire the skills to move up to higher-paying jobs? Is it right to tell an employer what to do with their business by coercing employers to pay employees higher than their marginal value? Is it right to cause more unemployment during a time when unemployment is still high? Is it right to grandstand about helping the poor when the minimum wage does a lousy job of targeting the poor and causes more unemployment amongst the poor, the very people proponents claim to help? The minimum wage is not smart. The minimum wage is not right. The minimum wage is merely poor public policy that harms those that it was intended to help.

Does It Matter If There Are Not Limits on Aggregate, Individual Campaign Contributions?

Earlier this week, the Supreme Court ruled 5-4 in McCutcheon v. Federal Election Commission (see ruling here) that the aggregate limits on political campaign contributions are unconstitutional. One side decries this ruling as the end of the democratic process and thinks that there will be more money adversely influencing politics because it gives politically motivated rich people an even more disproportionate say than they already have. The other side considers the ruling a victory for the First Amendment, can save the electoral process from gridlock, and make federal elections more substantive. What exactly is going on with this case to cause such hullabaloo from both sides?

Shaun McCutcheon, who was a general contractor in Alabama, wanted to donate funds to federal campaigns in the 2012 elections. However, McCutcheon was limited by the $48,000 cap on individual, aggregate contributions by §441a(a)(3) of the Federal Election Campaign Act (FECA). The FECA was created in response to Watergate, thereby preventing further corruption in elections. Normally, I would come up with a conclusion as to what I think about the ramifications of the ruling and how it will affect the future of campaign contributions. Instead, I will merely list a few considerations going forward:

1. There is no compelling empirical evidence as to whether limits such as the ones the Supreme Court ruled against actually work or not. If such evidence existed, it would be easier to make a call. Even the evidence of whether money guarantees campaign victories is ambiguous, which is problematic if the only basis for such regulation is the prevention of quid pro quo corruption and said regulation does not explicitly target the corruption in question.
2. I don't see aggregate limits on campaign contributions so much of an infringement on the First Amendment as much as an infringement on economic freedom. As Chief Justice Roberts indicated in his ruling, "money in politics at times seems repugnant to some, but so too does much of what the First Amendment vigorously protects." Unless the money is used to harm someone else (e.g., money used to hire a hit-man), I really don't care what people do with their money, regardless of whether they are rich or poor. In spite of all the talk about the rich overpowering the electoral process, big donors still make up a small portion of overall contributions. 
3. This Supreme Court case has some limitations. For one, it applies to federal candidates only. How campaign contributions will be limited for state and local candidates are done on a state-by-state level. Also, this ruling only affects aggregate limits, which addresses the total amount one can give to all candidates. The base limit, which is the maximum one can give to a single candidate, was not addressed in this ruling, which means that the base limits under campaign finance law still apply. Having base limits makes more sense than aggregate limits. After all, if giving money to eighteen federal campaigns at the base limit is permissible and doesn't affect levels of corruption, why not permit the nineteenth [or any number of campaigns]? Furthermore, this ruling would affect less than 600 donors. Citizens United v. Federal Election Commission had more of an impact on campaign finance law than this week's ruling did, but that won't stop pundits from talking about whether this is the "beginning of the end of campaign finance reform."
4. Are we on a slippery slope to unraveling campaign finance law? Maybe, maybe not. Between this ruling and the Citizens United ruling, there is arguably a trend in deregulation. However, that is like saying that McDonald v. Chicago and District of Columbia v. Heller will engender the complete deregulation of guns. Let's recognize the hyperbole for the logical fallacy it is.
5. In a way, this is actually more problematic for big donors because now, big donors cannot use the excuse of "I've reached my limit under federal law." It's a distinct possibility that donors can get fed up and actually donate less. 
6. If the Left is concerned about corruption through increased corruption, how about making Big Government less aggrandized? If there are less bureaucratic agencies and/or those agencies have less power and influence, there would be less incentive for campaign contributors to manipulate the political process. Ergo, if one cares about corruption, let's scale back the size of government.

Why the Earned Income Tax Credit Cannot Become the Silver Bullet of Poverty Reduction

The Great Recession and this stagnant recovery have shed some light on the issues of income inequality and poverty reduction. One particular debate that has recently arisen is the "Earned Income Tax Credit versus Minimum Wage." I started wondering about this after reading commentary from the Center on Budget and Policy Priorities (CBPP) regarding the Earned Income Tax Credit (EITC). Is one policy preferable over the other? Should we be implementing both, or for that matter, neither one? As for minimum wage, it should be no surprise that I do not consider it to be wise public policy. But what about the earned income tax credit? If Milton Friedman, one of the greatest libertarian economists in history, advocated for the earned income tax credit in the form of a negative income tax, shouldn't I find it to be sound policy? As much respect as I have for Milton Friedman, I have a mind of my own where I would like to take a look at the evidence and come to my own conclusions.

What was initially a small tax subsidy back during the EITC's inception in 1975 has transformed into a poverty relief program. The earned income tax credit acts as a form of a negative income tax that is supposed to assist low-income households with poverty relief. For individuals that make below a certain amount, rather than have to pay on the income tax, ones receives money in the form of a tax credit. Looking at the chart below (courtesy of the Tax Policy Center), there are three phases of the EITC. The first is the in-phase, which means that each added dollar of earned income receives a matching credit. The second level is the plateau, in which the additional income does not affect the size of the credit. The final phase is the out-phase, in which an increase in income translates to a smaller EITC. The credit continues to decline during the out-phase until one's income reaches the break-even point, which is when an individual no longer qualifies for the EITC.

Determining the net benefit can be tricky with something like the EITC. The first obvious cost is the decrease in tax revenue. The funds have to come from somewhere, and in this case, it would be the revenue collected from income tax. Furthermore, a Princeton University study (Rothstein, 2008) suggests that the EITC depreciates wages of low-skilled workers while harming non-EITC low-skilled workers, which is to say there is a distinct possibility that the EITC is actually trapping low-skilled workers in poverty. The Federal Reserve Bank of Chicago shows that when individuals receive their payments, they purchase healthier food (McGranahan and Schanzenbach, 2013). The downside to this benefit is that the EITC is one lump-sum, as opposed to spread out throughout the year, which means that the purchase of healthier food is more erratic because of mismanagement of money.

The EITC also comes with its benefits. The primary benefit of the EITC is that in increases employment (Meyer, 2010, p. 164-167), and the predominant research in the past 15 years illustrates that. Research also shows that it has a predominant, positive effect on single parents, which is great because single parenthood is shown to be the single largest factor in income inequality. The reason why the EITC incentivizes work is because one has to work to receive the tax credit. In theory, the phase-out of the EITC is supposed to discourage individuals to work because the EITC decreases with increased income. However, due to an inability of workers to freely schedule their hours and an imperfect perception of marginal tax rates, the concerns around phase-out are merely theoretical (Meyer, p. 168). Moreover, the EITC is shown to improve upon infant health (Hoynes et al, 2012), not to mention give a boost to K-12 scholastic achievement. The Congressional Budget Office also shows how the EITC can positively affect Social Security retirement benefits, which also erroneously assumes that Social Security is indefinitely solvent.

Furthermore, the EITC is a better tool for fighting poverty than the minimum wage, which is something economist David Neumark illustrates. Since most minimum wage earners are not in poverty, the EITC does a better job at targeting poorer households because the EITC is based on family income, and not the wage rate. The costs of minimum wage are squarely put on the employer, whereas the tax burden of the EITC is diffusely spread throughout the income tax base. More diffuse costs means that it is easier for employers to higher low-skilled labor than it would be when one implements a higher minimum wage. The EITC primarily focuses on households with children, which leaves single, childless individuals out to dry. The Brookings Institution just published a paper (Kneebone and Williams, 2014) showing how an expansion of the program would further aid childless workers and could rectify the situation.

For those of us who would like to shrink the size of government in a more incremental fashion, the EITC has some allure. Replacing the EITC or a basic income grant with the current welfare system would mean less government intervention. I understand that a direct cash transfer is still the government depriving individuals of a certain percent of their income, but at least with a direct cash transfer, the government doesn't tell the recipients of the cash transfer what they can or cannot spend the money, such as is observed in programs like the Supplemental Nutritional Assistance Program, aka the food stamp program. The other advantage of replacing the EITC with a welfare system is that it would reduce welfare caseloads (Meyer, p. 169), reduce administrative effort, and eliminate duplicative work, which would save taxpayer dollars. In theory, the EITC is supposed to be more clear-cut and targeted. However, the current implementation of the EITC is most bothersome.

The Mercatus Center points out that the government program with the highest improper payment rate is the EITC, which comes in at a whopping 22.7%. The high error rate is something both the Department of Treasury and the Government Accountability Office confirm. This might have something to do with the complexity of the EITC, which not only makes it difficult for qualifying recipients to navigate the application process, but also makes it difficult to enforce and detect fraud.

Until the improper payment rate is well in the realm of single digits, I could not possibly endorse that the EITC replace the current welfare system. Much like with the rest of the tax code, simplification of the EITC is a necessary first step so that a) low-income households are able to file for the credit without significant hassle, and b) payments are better applied. As previously mentioned, increasing the credit towards childless households could help with the perception that the government is punishing individuals for choosing to be single or childless. The EITC for those with children can be combined with other tax breaks to combine it into a single family tax credit.

Even with reform, I'm still skeptical. Much like the CBPP, I have my doubts about the EITC's overall efficacy, but for different reasons. I'm still worried about it being implemented without a high improper payment rate. I'm also worried about the political unfeasibility of removing the current welfare system because many of the programs are too popular to gut. I also think that a silver bullet policy is as rare as common courtesy these days. Although there will inevitably be other policies to help increase employment and reduce poverty, I foresee the EITC playing a more integral role in the "War on Poverty."


10-18-2015 Addendum: This policy brief from the Cato Institute highlights the work disincentives, the fraud, and costs to the taxpayer that might not make the EITC so alluring.