Who Benefits from Earned Income Tax Credits?

The last federal Liberal Budget promised to introduce a tax credit to supplement the incomes of the working poor, and this commitment was re-iterated in the first Conservative Budget. The recent Toronto-based task force on Modernizing Income Security for Working Age Adults advocated such a supplement, and this widely-publicized proposal has been taken up by several of the leading federal Liberal leadership candidates. Models are clearly to hand in the US and the UK. (Design details can and do differ a lot.)

Progressive economists have argued in the past that wage supplements may mainly benefit low wage employers rather than low wage workers. Mario Seccareccia made this point at length in a critique of Guaranteed Annual Income proposals, published in Studies in Political Economy more than a decade ago.

A recent paper (The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK
by Ghazala Yasmeen Azmat, Centre for Economic Performance, May 2006.) is of interest.

“Tax credits have been a popular way to alleviate in-work poverty. The assumption is typically that the incidence is on the claimant workers. However, economic theory suggests no particular reason to believe that this should be the case. This paper investigates the incidence of the Working Families Tax Credit in the UK introduced in 1999, which unlike similar tax credit policies was paid through the wage packet, increasing the connection between the employer and worker with regard to the tax credit. Using two stage parametric and nonparametric censored regression methods we find compelling evidence to suggest that (1) the firm discriminates by cutting the wage of claimant workers relative to similarly skilled nonclaimant workers when looking at men and (2) there is a spill-over effect onto the wage of both groups for both men and women. ”

While recognition of the fact that many working families live in poverty due to low and unstable earnings is welcome, the pros and cons of introducing a US style Earned Income Tax Credit deserve to be seriously debated. Elsewhere, I have argued that an EITC has a place in a comprehensive strategy to meet the needs of the working poor, but should not displace the need to raise the wage floor via minimum wages and/or enhanced access to collective bargaining, or to improve access to EI benefits, or to expand a wide range of more broadly-based income benefits and social programs. The family-income tested basis of an EITC is also potentially problematic, since it could result in high tax back rates on secondary family earners, such as low wage women workers and young working adults still living at home. (See “Are Wage Supplements the Answer to the Problems of the Working Poor?”

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