[PEN-L:11464] Re: Child tax credit

[Robert Cherry <RobertC@xxxxxxxxxxxxxxxxx>]

     My own assessment is that the EIC was thought by small businesses
(chambers of commerce) as an ALTERNATIVE to minimum wage increases and
probably had some expectation that it would increase labor supplies and,
thereby lower pressures on wages in less skilled service occupations.

    Second, probably a majority of two-children families which receive the
EIC are in the $19,000-$25,000 range.  Indeed, a family with two dependent
children and adjusted gross income equal to $20,000 is still receiving an
EIC equal to about $2000.  Thus, the argument that the EIC should
distinguish between those who receive the child credit and those who should
not is problematic.

    Third, this could interestingly offset some of the work disincentives
inherent in the EIC.  For families above $16,000 there is a quite high
implicit tax rate:  21% loss of EIC, 7.65% social security, and 15
percent federal.  Thus, without state or local taxes, these households face
a 44 percent marginal tax rate on each dollar earned. It is even higher if
they are also qualifying for other means tested programs like foodstamps,
health care, and/or housing subsidies.  This is quite high considering that
work involves commuting expenses and for most of these families day care
issues.  I would expect that for households in this income range with two
wage earners, it becomes quite rational for one (the wife?) to reduce paid
employment.   Therefore, I would expect that if these families in the
$16,000 to $19,000 range know they would receive an additional $1000 for the
two children they have if they could raise their adjusted gross income above
$19,000 that they would seek more paid employment.  (Isn't neoclassical
analysis wonderful!)

Robert Cherry/Brooklyn College