Planet Money
4:58 am
Fri March 15, 2013

A Surprisingly Uncontroversial Program That Gives Money To Poor People

Last year, a federal program called the Earned Income Tax Credit took about $60 billion from wealthier Americans and gave it to the working poor. And here's the surprising thing: This redistribution of wealth has been embraced by every president from Ronald Reagan to Barack Obama.

"This program worked," says Richard Burkhauser, an economist at Cornell University and the American Enterprise Institute. "And there's not a hell of a lot of these programs where you can see the tremendous change in the behavior of people in exactly the way that all of us hoped it would happen."

When he says it worked, he means it helped single mothers on welfare find work and get out of poverty.

In the 1930s, in the early days of welfare, many of the women who received it were widows. Americans didn't think single mothers should have to work, so the government paid them to stay home. But by the '90s, the idea of paying people not to work seemed backwards to many Americans. If moms want to get paid, many thought, they should get a job.

The Earned Income Tax Credit started as a small program in the 1970s and was expanded under President Reagan. But it was President Clinton who turned the program into what it is today — one that effectively gives low-wage working parents a big bonus. For some workers making around $15,000 a year, that bonus can now reach nearly $6,000. As the name suggests, the money is paid out like a tax refund, when workers file their income taxes.

Mirian Ochoa was on food stamps, in debt from a divorce and caring for a son in special ed. On her long commute to work, she remembers going past McDonald's every day and smelling the french fries but telling herself, "You have to say no, because I have to pay my rent."

The first year she got the credit, Ochoa received $3,000. Over the years, she says, the credit allowed her to pay off debts, get an associate's degree in accounting, get off of food stamps, and move to a better school district for her son. "I found an apartment there, and I changed my son's life," she says.

This gets to one feature of the credit that economists love — something that goes back to Milton Friedman, one of the most influential conservative economists of the 20th century. He argued that, rather than creating lots of targeted programs for poor people, the government should simply give them money and let them decide how to spend it — even if, like Mirian Ochoa, they sometimes spend $1,000 to take their son to Disney World and Universal Studios.

Her son's favorite part was the Incredible Hulk roller coaster. "He's small, little fat boy, and running and saying, 'Mother, come with me, do the ride,' " she says. I say 'No, it's too much, I cannot do it. But go! Go!' "

To Ochoa, this was money well-spent. Her ex-husband had promised the trip to her son but never came through. And she says taking him was a key moment in his life. Now he's in college, studying graphic design in Orlando, Fla.

The Earned Income Tax Credit is not perfect. It doesn't help people who can't get work. Some people game the system. Others are eligible but never collect. But while most programs to help the poor are constantly under the magnifying glass, this one has expanded every decade since the 1970s. Encouraging poor people to work and giving them a boost for keeping at it remains relatively uncontroversial. For now.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

And dreaded though it might be, tax time also holds the promise for many of a tax refund. That includes the working poor, because of something called the earned income tax credit. Last year it took about $60 billion from taxes paid by better off Americans and gave it to the poor. And here's the surprising thing: This redistribution of wealth has been embraced by every president from Ronald Reagan to Barack Obama. To tell us why, here's Marianne McCune of Planet Money and WNYC.

To tell us why, here's Marianne McCune of Planet Money and WNYC.

MARIANNE MCCUNE, BYLINE: One sign of how happy the Earned Income Tax Credit makes people:

LYNN MATTHEWS: (Singing) Earned Income Credit.

MCCUNE: That's Lynn Matthews - filing her tax return at a pro-bono tax center in Newark, New Jersey. And Matthews isn't the only one singing the program's praises. Richard Burkhauser is an economist from Cornell University.

RICHARD BURKHAUSER: I'm not exaggerating when I'm telling you, look, I've been doing public policy since the 1970s. This program worked. And there's not a hell a lot of these programs where you can see the tremendous change in the behavior of people in exactly the way that all of us hoped it would happen.

MCCUNE: The Earned Income Tax Credit was designed, in part, to put welfare moms to work. See, in the 1930s in the early days of welfare, many of the women who received it were widows. Americans didn't think they should have to work. So the government paid them to stay home. But by the '90s the idea of paying people NOT to work seemed backwards. If moms want to get paid they should get a job.

BURKHAUSER: And by God, they did, it worked.

MCCUNE: In 1993, President Bill Clinton offered low wage workers this deal: If you've got kids and you're working but poor, for every dollar you earn, the government will give you a big bonus. Let's say you make $15,000 a year - that bonus could hit almost $6,000 dollars. And it comes in one lump sum. The first year Mirian Ochoa got it...

MIRIAN OCHOA: I'm say are you serious? This is for me?

MCCUNE: More than $3,000 for a woman who made about $9,000 that year. Economists say the Earned Income Tax Credit lifts working people out of poverty. Ochoa came from Ecuador with a green card. She was on food stamps, in debt from a divorce, and caring for a son in special-ed. On her long commute to work, she remembers going past McDonald's every day and smelling the French Fries, but telling herself...

OCHOA: You have to say no, because I have to pay my rent.

MCCUNE: Ochoa says that first $3,000 dollars - and even larger refunds since - allowed her to do things she never could have. Exactly the point. She paid her debts. She got an Associate's degree in accounting. Got off food stamps. She even moved to a better school district for her son, despite higher rent.

OCHOA: I found apartment there and I changed my son's life.

MCCUNE: This gets to one feature of the credit that economists love: it goes back to Milton Friedman, one of the most influential conservative economists of the 20th century. His idea was: Don't give people programs; give them money and let them decide how to spend it. And maybe they don't spend it on the basics.

The first year Mirian Ochoa got her credit, she spent $1,000 on two plane tickets to Disney World and Universal Studios. Her son's favorite part - the Incredible Hulk roller coaster.

OCHOA: He's small, little fat boy, and running and saying mother, come with me do the ride. I say no, it's too much, I cannot do it. But go. Go.

MCCUNE: To Ochoa, this was money well-spent. Her ex-husband had promised the trip to her son, but never came through. And she says taking him was a key moment in his life. Now he's in college studying graphic design in Orlando. The Earned Income Tax Credit is not perfect. It doesn't help people who can't get work.

Some people game the system. Others are eligible but never collect. But, while most programs to help the poor are constantly under the magnifying glass, this one has expanded every decade since the 1970s. Encouraging poor people to work and giving them a boost for keeping at it remains relatively un-controversial - for now. Marianne McCune, NPR News, New York. Transcript provided by NPR, Copyright NPR.