Social_Policy

Anyone familiar with tax and expenditure legislation knows full well that interest groups constantly win special favors from federal and state legislators. For a long time I have struggled with how to make better use of the principle of equal justice to restrain or eliminate bad policy. Here are a few thoughts to get the conversation started.

Work may be a four-letter word to some citizens in slow-growing Western European economies, but Americans know better. Senior fellow Eugene Steuerle explains why our work habits are suddenly so important.

Most workers do not contribute the maximum allowable amount to employer-sponsored tax-deferred retirement plans. The share of maximum contributors increased between 1990 and 2003, as did the percentage of participants who contribute the maximum or at least 10 percent of earnings. But virtually all the growth in maximum contributors came from groups with high shares of maximum contributors in 1990. Recent increases in contribution limits can be expected to reduce shares of maximum contributors, but raise relative shares of maximum contributors among high-earning and education groups.

Individual giving to public charities-most of which comes in the form of charitable deductions from tax filers who itemize on their returns-actually comprises only a small part of charities gross receipts each year: between 8 and 12 percent of gross receipts over the 1996-2003 period.

Since 2001, the dollar limit on employee contributions to employer-sponsored tax-deferred retirement accounts has increased from 32 percent of average earnings ($10,500) in 2001 to 39 percent of earnings in 2006 ($15,000). Employees over age 50 may make additional "catch-up" contributions, which will raise the total dollar limit for them to 52 percent of average earnings in 2006. But very few employees contribute the maximum allowable amount. Of those participating in plans, only 6 percent contributed the maximum amount in 2003.

The earned income tax credit was enacted to offset the social security payroll tax for low-income working families. The credit has been significantly expanded and now provides substantial income to these families. However, very low-income workers, such as those working at the minimum wage, have seen the value of their credit erode due to interaction between the earned income tax credit, the minimum wage, and inflation.

The panoply of U.S. tax and transfer programs often act in concert to penalize low-income families who increase their work effort or marry, by saddling them with high effective marginal tax rates. These effective marginal tax rates-often the product of multiple, hidden phase-outs in benefit programs like the EITC, Food Stamps, and Medicaid-are often higher for low-to-middle income families with children earning between $10,000 and $40,000 than they are for more well-to-do families earning above, $90,000.

The Earned Income Tax Credit provides nearly $40 billion to low-income families with children. A potential unintended consequence of the credit is lower pretax wages, in which case only part of the subsidy would accrue to workers. We examine the extent to which EITC expansions lower the pretax wages of working parents. Our findings are inconclusive. The gross hourly wages of less-skilled single women are found not to vary by the number of children, as does the EITC. In addition, the wages of black single mothers track the minimum wage for nearly the entire time period.

The Work Opportunity Tax Credit (WOTC) offers subsidies to firms that hire disadvantaged workers, including certain welfare recipients, food stamp recipients, people with disabilities, and others. The similar Welfare-to-Work (WtW) tax credit offers firms potentially larger subsidies for hiring long-term welfare recipients. The tax credits from these programs totaled nearly $500 million in 2003, according to the Office of Management and Budget.

In 1997, Congress created a $500 per child tax credit (CTC). It has since been increased to $1,000 and made available to some lower-income families with children, even if they had no tax liability. Still, many low-income families (as well as some with high incomes) receive less than $1,000 per child in tax benefits. Moreover, because of differences in income, family composition, and employment status, nearly half of Blacks and 46 percent of Hispanics receive no or reduced benefits from the CTC because their incomes are too low.