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America is enjoying the longest peacetime expansion in its history. A New Economy has emerged, thanks to the spread of innovative information technologies, heightened international competition, the widening deregulation of the economy's commanding sectors, more than two decades of corporate restructuring, and the widespread embrace of the financial markets, especially the stock market.
The gains from the lengthy boom are no longer confined to the rich, the technologically savvy, and the well-educated. With the unemployment rate at a three-decade low and "Help Wanted" signs everywhere, the fortunes of low-income workers are improving rapidly. The unemployment rate for those without a high school diploma is as low as it has been since the Bureau of Labor Statistics started counting the figure, and the welfare caseload plunged by 50% from 1994 to 1999.
Yet any celebration of the New Economy is muted by a major blight: child poverty. Almost one in five children in the U.S. still lives in destitution, and many more live just above the average threshold of $16,660 for a family of four and $13,003 for a family of three. Yes, the poverty rate for children dropped to 18.9% in 1998 -- below 20% for the first time since 1980. Yet children 18 and under make up 39% of the poor, even though they account for 26% of the population, according to the Census Bureau.
LIMITED FUTURES.
There are many reasons for this disturbing state of affairs, ranging from technological change sharply skewing the distribution of income and wealth, to a striking increase in families headed by single women, to poorly performing inner-city public schools. Whatever the explanation, being poor in America at the millennium limits the odds that these kids will become tomorrow's rich.
Economic policy at the federal, state, and local levels can make a difference to the future of these children. Specifically, tax reform could offer an effective means of helping children from families with low incomes. A growing number of academic scholars and think-tank policy mavens are intrigued by the idea of combining into one benefit the earned-income tax credit, child tax and care credits, and the dependent exemption. This reform wouldn't just help put food on the table. It would also be a big step toward a simpler, more rational tax system.
"Instead of applying for different benefits in different places," says C. Eugene Steuerle, senior fellow at the Urban Institute, "the taxpayer could apply for one basic or unified credit. At least all calculations could be done in one place."
One proposal is the Universal Unified Child Credit designed by Robert Cherry and Max Sawicky of the Economic Policy Institute. It builds on the EITC, perhaps the government's most successful program for moving working families over the poverty line. The EITC provides refundable tax credits to low-income families with children, with the benefits varying depending on the number of children in a household. But the $30 billion EITC has several drawbacks. The benefit phases out as wages increase. So the tax effect is analogous to a steep spike in marginal tax rates before the poorer taxpayer moves into a higher income bracket.
For example, with regard to a taxpayer earning close to $20,000, Steuerle writes: "[Implied] is a net marginal tax rate of about 21% once the EITC starts phasing out, but the positive income tax rates are offset by the personal exemptions and the child credits. However, by the time the taxpayer earns a bit more than $20,000, she starts paying a marginal rate of about 36% as the 15% regular marginal tax rate kicks in. Combined with a Social Security tax rate of close to 15% percent (crediting the employer's payment to the employee, who usually bears the cost), the tax system, including the EITC, starts taking away about one-half of additional earnings. As the taxpayer moves a little beyond $30,000, there's no more EITC and the marginal rate falls again."
SIMPLIFIED.
A universal unified child credit would redress some of the EITC drawbacks. It would be a credit available to all taxpayers with children whose income is derived from employment. Because it combines the EITC, the child credit, and other tax benefits for families with children, it's tax simplification. And though the universal benefit would shrink as wages go up, it wouldn't phase out completely. Instead, the UUCC would settle at a minimum benefit of $1,270 per child, available to all taxpayers. This more gradual phaseout reduces both the work disincentive and the marriage penalty, and the rough annual cost of the proposal is some $32 billion, Steuerle says. (You can read the detailed report Giving Tax Credit Where Credit Is Due at www.epinet.org.)
Of course, no tax-reform proposal will go anywhere without political backing. Steuerle is hopeful. He believes the potent combination of minimizing disincentives to work, reducing the marriage penalty, increasing the benefits to working families, and simplifying the tax system offers the potential for creating a bipartisan push for enactment.
Many people are upset that so many poor children live in this country at a time of unprecedented prosperity and wealth creation. "I believe firmly that success in reforming the system of tax benefits will require some kind of liberal-conservative coalition," says Steuerle. (Click here for his two-part briefing paper on the idea.)
Educational reform is key to reducing income inequality in the long term. American society has fallen far short in providing a quality education for the lower 20% to 30% of the income distribution. But school reform takes time. Policymakers can make a difference to low-income kids -- right now -- by adjusting the tax system to help low-income families with children. Do it, Congress.
Farrell is contributing economics editor for Business Week. His Sound Money radio commentaries are broadcast on Saturdays in 171 markets nationwide
EDITED BY DOUGLAS HARBRECHT
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