Association for Public Policy Analysis & Management

This paper develops a straightforward mechanism to mitigate wage stagnation: a wage tax credit of 100 percent of earnings up to a maximum credit of $10,000—a Universal Earned Income Tax Credit (UEITC). A dedicated, broad-based, value-added tax (VAT) of 11 percent would finance the new credit. The maximum credit would be indexed to economic growth.

The new wage credit and the corresponding VAT would phase in over four years. After the phase-in period, the maximum wage credit would grow with per capita Gross Domestic Product (GDP). Like other income, but unlike the EITC and most other credits, the UEITC would be subject to income taxes. To partially offset the loss of the EITC, which increases in value with the number of qualifying children (up to 3), the current law child tax credit would increase from $2,000 to $2,500 and be fully refundable.

In 2023, when fully phased in, the proposal would cut average tax bills for most people in the four lowest income quintiles.

The proposal is similar in some ways to a universal basic income (UBI)—an unrestricted cash grant—in that the UEITC is universal and highly progressive; however, the UEITC is only available to adults over age 16 who have earned income. This is based on my judgment that the primary failure of the market economy is not in providing jobs—unemployment as of December 2018 was 3.9 percent—but that many jobs pay poorly. There are strong political advantages. The UEITC plus enhanced child tax credit are targeted at workers and families with children, two groups that many Democrats and Republicans are willing to support. The public is wary of assisting able-bodied adults who do not work. Eighty-seven percent of respondents in a recent poll supported work requirements for public assistance programs. (Doar, Bowman, and O’Neil 2016)

I intend my proposal to serve as a starting point for discussion about how to address the distributional flaws in the market economy without hampering economic growth. Policy makers might decide to raise or lower the credit rate or maximum amount of earnings eligible for the credit, and scale back or increase the child tax credit, with commensurate changes to the VAT to preserve budget neutrality. I also lay out several design options that might be considered. For example, a credit could be made available to full-time caregivers or those who are in retraining programs. There would also need to be changes to the Social Security program to prevent cuts in real benefits.