“Democratic Assemblymembers Mike Gipson of Gardena and Miguel Santiago of Los Angeles recently authored two bills that would expand California’s Earned Income Tax Credit and its Young Child Tax Credit.
“Combined the bills would cost about $1.1 billion annually, in a year the state is predicting a $22.5 billion to $25 billion deficit.”
Milton Friedman’s Idea
The negative income tax or EITC actually was proposed by one of the most renowned free-market economists, Nobel laureate Milton Friedman.He was an occasional source of mine for editorials. And he liked our free-market approach so much, around 1995 he visited us at the Orange County Register Editorial Board. He was one of the most brilliant minds I’ve ever met. Yet he could explain complex concepts so even editorial writers could understand them.
Friedman’s main point was that traditional welfare programs, such food stamps (CalFresh today), Aid to Families with Dependent Children, and subsidized housing (such as Section 8 today) take away the freedom of action of recipients. As he put it:
“All responsible students of the problem, whether on the left or the right, have come increasingly to recognize that present welfare programs have grave defects, and, in particular, that direct relief and aid to dependent children demean both the recipients and the administrators.
“I was much impressed some years ago when Herbert Krosney talked to me about a study of New York welfare programs he was engaged on—and which has since been reported in a splendid book, Beyond Welfare. The people whose freedom is really being interfered with are the poor in Harlem, who are on relief. A government official tells them how much they may spend for food, rent, and clothing. They have to get permission from an official to rent a different apartment or to buy second-hand furniture. Mothers receiving aid for dependent children may have their male visitors checked on by government investigators at any hour of the day or night. They are the people who are deprived of personal liberty, freedom, and dignity.”
Traditional Welfare’s Problem
Another problem is, when the poor get jobs, their welfare commonly is cut off. That means they suffer a highly graduated income tax. A 2018 study by MIT’s Sloan School of Management found:“But perhaps one of the biggest flaws in the system is what happens when welfare recipients start to earn more money. ‘The irony of our welfare system is that poor people pay very high taxes — for each dollar of earnings they lose benefits,’ [MIT economics professor Joshua] Angrist said.
“That is to say, by working, people on welfare may actually find themselves worse off — particularly if they earn enough to lose benefits but not enough to pay for those things themselves.
“For example, suppose someone on welfare earns an extra $1,000, but loses $500 of their benefits as a result. This amounts to a 50 percent marginal tax rate. Some people face marginal tax rates of 80 percent — one study even showed marginal tax rates of more than 100 percent [PDF]. ‘Rich people with salaries don’t pay a marginal tax rate that high,’ Angrist said. ‘Milton Freidman was one of the first to look at this and say, ‘We ought to scrap the whole system.’’
The Key to the Negative Income Tax/EITC
Friedman stressed one key to adopting the negative income tax/EITC: You have to get rid of the existing welfare programs, or at least sharply reduce them. But there are two problems with that, as he well knew. First, what if people just spend the cash on booze or drugs, instead of the necessities of life for them and their children?So, would these new California bills eliminate any existing welfare programs?
“AB 1498 will increase the minimum credit amount for the California Earned Income Tax Credit to $300. The credit would provide meaningful assistance to over 3 million workers no matter their dependency status. The California Budget and Policy Center has estimated that most CalEITC recipients receive less than $200 from the credit, and by establishing a $300 minimum amount for the CalEITC will make the benefit more meaningful by providing recipients with greater economic security and encouraging eligible taxpayers to claim the credit. The result will incentivize tax filing and in doing so, there will be an uptake of federal credits to individuals by boosting family’s total incomes and local economies.”
Nowhere is any other welfare program reduced, as Friedman recommended.
“Expands the number of taxpayers eligible for the California Young Child Tax Credit (YCTC) by removing the requirement that a qualifying child must be younger than 6 years of age as of the last day of the taxable year.”
Conclusion
These two bills, and the EITC in general in California, are not negative income taxes in the way Friedman envisaged, because welfare programs are not cut in equivalent amounts. They’re just direct welfare payments.Well, it’s an expensive state with millions of poor people. They’re going to be getting a lot of welfare programs no matter what.
The reform stressed work requirements to get welfare, with ample subsidized education opportunities to train for decent jobs. The reform continues to be criticized for allegedly harming women and racial minorities. But it actually was quite successful in reducing welfare rolls and getting people jobs.
Alas, the time is not ripe for a revision of that reform. The two California EITC bills are nothing innovative. Just more of the same to deal with other failures, especially the refusal to reduce housing costs by reforming state regulations, such as—to repeat for the thousandth time—the California Environmental Quality Act.
