Employment-Based Tax Credits for Low-Skilled Workers

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Released: December 2007 • Discussion Paper

Related Topics: Employment & Wages, Tax Policy

Authors:

  • John Karl ScholzDean of the College of Letters & Science, University of Wisconsin, Madison
 
 

Families in low-income communities face three interrelated problems: unemployment rates are high, incarceration rates of low-skilled men are high, and a large fraction of children in low-income communities are being raised in single-parent households. To address these interrelated problems, I propose a two-part policy designed to increase the return to work. The first part of my proposal is an expanded earned income tax credit that would apply to low-income, childless taxpayers. The second part of my proposal is a targeted wage subsidy for low-wage workers who live in certain economically depressed areas, whereby the federal government would pay subsidies of 50 percent of the difference between the worker’s market wage and a target wage of $11.30 per hour. The premise for adopting these policies is straightforward: increasing the return to work for childless low-skilled workers will lower unemployment rates and achieve the dual social benefits of reducing incarceration rates and increasing marriage rates, thus reducing the number of children being raised in single-parent households. The proposal would redistribute $10.4 billion to poor, working individuals. Based on empirical estimates from the literature, I expect employment to increase by 850,000 jobs and crime to fall by over one million incidents. Conservative estimates of the social cost of crime indicate that the social benefit from reduced crime could cover 8 percent or more of the cost of the proposal. Many estimates of the cost of crime would claim much larger cost saving. The proposal would also increase marriage and improve the environments in which poor children are raised.

The Challenges Faced by Low-Skilled Workers

Families in low-income communities face three interrelated problems: unemployment rates are high, incarceration rates of low-skilled men are high, and a large fraction of children in low-income communities are being raised in single-parent households. I claim no particular originality in suggesting that these three issues are intertwined. Richard Freeman (1996) writes, "How to improve the job market for less skilled young American men, and reverse the huge decline in their earnings and employment opportunities, is the problem [emphasis in original] of our times, with implications both for crime and many other social ills" (41). The premise of the two-part proposal in this paper is straightforward: increasing the return to work for childless low-skilled workers will lower unemployment rates and achieve the dual social benefits of reducing incarceration rates and increasing marriage rates, thus reducing the number of children being raised in single-parent households.


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