Tax Refund


A recent hearing of the House Ways and Means Committee’s Subcommittee on Tax Policy brought attention to an important topic: How can the tax code spur economic growth while sharing the gains broadly? My testimony at the hearing detailed how to achieve that goal while avoiding proposals that could do more harm than good.

For an example of one such proposal, the hearing considered replacing our current tax system with a national retail sales tax. However, that plan would require extremely high rates, massive cuts in government expenditures, or unprecedented increases in the debt. You can read more about the drawbacks of that idea here.

My testimony argued that investing in children and supporting the wages of working people (which have been stagnant for the past half century) are critical components in providing equitable and sustainable economic growth. Two options to achieve this are a fully refundable child tax credit (CTC)—as implemented temporarily in 2021—and a universal earned income tax credit (EITC). Finally, Congress should regularly evaluate the effectiveness of all tax expenditures and reform or repeal them as necessary.

Investing In Children

Advocates for tax breaks often paint them as “investments,” with the promise that they will pay dividends in the long run. Often the promise of long-run benefits are overstated, but research shows helping vulnerable children can pay higher returns than almost any other public investment.

A great model is the temporary CTC expansion in 2021, which proved to be an incredibly successful anti-poverty program for families with children.

The CTC was expanded three ways. First, the maximum credit increased from $2,000 to up to $3,000 per qualifying child ages six and over and $3,600 per child under age six. Second, the maximum age eligible for the $3,000 credit increased from 16 to 17.

Third, the phase-in with earnings of the refundable portion of the credit was eliminated. All families with qualifying children were eligible to receive the maximum credit without regard to earnings or taxes owed. This temporary expansion benefitted almost 19 million children in families who typically do not earn enough to receive the full CTC benefit. The larger, refundable CTC cut child poverty nearly in half in 2021.

Ending child poverty so all children have a chance to grow into healthy, well-educated adults would be good for our economy and the federal budget. Child poverty costs the US as much as $1 trillion a year, since children experiencing poverty tend to earn less and pay less in taxes. They are also more likely to require public assistance as adults.

It reminds me of the old Fram oil filter commercial that had the punch line: “You can pay me now, or you can pay me later.” But kids aren’t cars. If a car breaks down because of poor maintenance, that’s an inconvenience. If a child’s life is ruined by poverty, that’s a tragedy. It is also a drag on the economy.

Support Work

Increasing economic growth creates the possibility that everyone can be made better off. But for the past 50 years, many American workers have been left behind. Making sure workers at all levels share in the benefits of economic growth is not only a fairness issue, but essential to preserving the forces that fuel that growth.

For most of our country’s history, economic growth has helped most workers by making them more productive. But several factors, especially unprecedented technological change, have altered that equation. Machines and AI are increasingly substituting for labor, and that trend is unlikely to abate. It’s one reason why median wages have barely kept pace with inflation over the past half century, despite a doubling of real GDP per capita over the same period.

I believe that wage stagnation is a significant factor behind the discontent of many American workers, even as we remain the richest country in history. Unless we can find a way to share the gains from growth more broadly, resistance to pro-growth policies will increase. History dating back at least as far as the Industrial Revolution suggests that workers will resist mechanization when it is perceived as a threat to their livelihood.

One way to prevent a 21st-century Luddite rebellion would be to turbocharge the earned income tax credit.

My favorite option for doing that would be to expand the EITC to provide a large enough subsidy that everyone working full-time at the minimum wage or above could escape poverty. In a 2021 paper, I proposed a new universal EITC that would provide a 100-percent wage subsidy on the first $10,000 of earnings. A single person making $15,000 per year before tax would earn $25,000 including the credit. Making the credit universally available would also make it possible to provide the benefits in advance to workers throughout the year, unlike the current EITC. The 2021 CTC included this feature, which helps improve cash-flow for families living paycheck-to-paycheck.

The maximum credit amount would be indexed to per-capita GDP. For the first time in a very long time, workers would be guaranteed a share in the benefits of economic growth, even if their wages do not increase.

The proposal would be expensive, but probably not more than the universal basic income built into the FairTax (the retail sales tax option discussed above). It could be financed with a broad-based value-added tax, as exists almost everywhere outside the US, or an income tax surcharge. Including the effect of the new taxes, the UEITC combined with a refundable CTC would be highly progressive, raising after-tax income by an average of 23 to 28 percent (depending on financing option) for the lowest-income 20 percent, and raising taxes by 7 to 14 percent of income for the top 1 percent. (See Figure 3 here.)

There are also incremental, less expensive options like expanding the current EITC to provide meaningful support for single adults even if they don’t live with their children.

Expanding economic growth and increasing prosperity for American families are crucial for the continued economic health of our country. To meet this moment, we could better support America’s low-wage workers and children, avoid unproductive tax reforms, and set up a regular process to evaluate all tax subsidies.

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