Can tax law produce healthier babies? Those aren’t the kinds of questions most tax experts focus on, but Professor Diane Whitmore Schanzenbach shows how the design of our tax laws can affect people in profound ways. In this episode we discuss the Earned Income Tax Credit and how it has affected the lives of millions of Americans living in poverty. The EITC has drawn low-skill mothers into the workforce more effectively than even optimistic observers in the mid-1990s might have hoped. It has also taught us important lessons about how the tax tools we use to help our most vulnerable neighbors can affect everything from whether they eat healthy food to the birthweight of their infants. Schanzenbach tells us what she has learned about the limitations and possibilities of delivering hope through the tax law. The pencil question comes from an article by Julie Roin.
Diane Whitmore Schanzenbach is the director of the Institute for Policy Research at Northwestern University and the Margaret Walker Alexander Professor at the university. From 2015-2017, she was the director of the Hamilton Project, an economic policy initiative housed at the Brookings Institution in Washington, DC. She is also a research associate at the National Bureau of Economic Research, a research affiliate of the Institute for Research on Poverty, and a nonresident senior fellow in economic studies at the Brookings Institution.
Whitmore Schanzenbach studies issues related to child poverty, including education policy, child health, and food consumption. Much of her research investigates the longer-run impacts of early life experiences, such as the impacts of receiving SNAP benefits during childhood, the impacts of kindergarten classroom quality, and the impacts of early childhood education. She recently served on the Institute of Medicine’s Committee on the Examination of the Adequacy of Food Resources and SNAP Allotments.
This conversation was recorded in 2019. Since the COVID-19 pandemic struck, Diane has been researching the effects of the pandemic on food insecurity in real time. She also has created an app with an IPR summer undergraduate research assistant that tracks measures of food insecurity across all 50 states.
Our student quote is read by Aly Mariani.
Resources:
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return, the nicest one I've ever seen.
Speaker 3:
Okay folks, but remember your manners, no stampeding. Walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is The Tax Maven. Here we are going to in each episode, talk to our tax maven, who will be a person proving Archimedes' point that, "A single person with a lever long enough and a place to put it can change the world." The lever in this case is tax and the place to put it is here at NYU Law.
I'm Steven Dean, the Faculty Director of the Graduate Tax Program at NYU Law. I'm here with Diane Whitmore Schanzenbach, the director and faculty fellow of the Institute for Policy Research, and the Margaret Walker Alexander Professor of Human Development and Social Policy at Northwestern.
One of the ways that the United States and countries around the world address poverty is with a government subsidy for low income workers. Our earned income tax credit or EITC has become a big part of the way we help those in need to help themselves. But it is far from perfect, and improving it could accomplish a wide range of important goals. From helping families choose healthy foods to increasing the birth weights of our children.
Diane Whitmore Schanzenbach:
We have had a major reform of how we do social policy for anti-poverty policy in the United States, around 1996, when we had welfare reform. What we did at that point was push a lot of low skill single mothers into the workforce and say, "Instead of us giving you money to stay home with your kids, we want you to work." Those moms are typically only eligible for low wages, and they just can't earn enough on their own to make ends meet. So what the earned income tax credit does is top up those wages, gives them a bonus payment and says, "If you're earning, we're going to match some of that earnings so that you've got more money to spend."
Steven Dean:
This is not just a US phenomenon. This is something that I've noted, and you probably know more about this, that other countries do as well.
Diane Whitmore Schanzenbach:
Yeah, that's right. That's right. Ours is very extensive, and there are lots of twists and turns with it. But this is just basic economics and a lot of countries have adopted systems like this. Where they're trying to encourage people to go out to work, but realize that maybe with their own skills, they don't have enough... Or they just can't command a wage that is enough of a living wage. So we need social policy to come alongside them and prop their resources up, so that they can raise a family, make ends meet,
Steven Dean:
Would somebody who was pretty knowledgeable about the way all of this worked in the mid '90s, look at what's happening today and be surprised or would they say it looks pretty much like I remember it looking.
Diane Whitmore Schanzenbach:
I think that we did not predict how successful these various policies were going to be at bringing low income working moms, especially into the workforce. So what we saw was the big expansion in the earned income tax credit. I want to say increased the likelihood that a single mom worked by something like 13 percentage points, was just a huge shift. When you look at the overall trends you see this big inflection point, which was the 1-2 punch of welfare reform and this large expansion in the earned income tax credit. So I think everybody yeah, would be surprised at what just a sea change we've had in the likelihood that that people work.
Steven Dean:
Would you describe that as a positive or, just more complicated?
Diane Whitmore Schanzenbach:
It's complicated.
Steven Dean: Okay.
Diane Whitmore Schanzenbach:
So let's see, it's complicated for a number of reasons. So, I think many people, and I'm one of them, thinks that it's important for people to be connected to the economy, work is good intrinsically. But there are trade offs, especially for families with very young kids in terms of where's the child going to be if they're not at home with a relative? What kind of childcare is available to them? We're just not doing a great job of that. So kind of what we've seen is, especially among moms with the youngest kids, their children are being removed from the home and put into by and large low quality childcare. Now our best estimates of what's the overall impact of this seems to be that there's more good than harm from mom going to work, and getting the earned income tax credit. I'm not sure we'd see the same thing if there wasn't such a robust EITC alongside. But boy, there's a lot of room for us to be doing this better.
Steven Dean:
What are some of those ways? What are some of the ways that we could improve the delivery of this subsidy, this wage subsidy, to low-income workers? What could we do better?
Diane Whitmore Schanzenbach:
All right, so one of the really thorny issues around here that we need to figure out how to do better, whether or not we can do it with the EITC is maybe a separate question. But it is sort of the lumpy nature of providing these extra resources to families. So the way the EITC was designed is we're going to look at your income over an entire year. Sort of at the end of the year, we'll say, "Okay, this is how much you earned, we'll top you up." Well, that means that you only get one large lump sum payment once a year.
There've been lots of studies of that to see how do people spend those resources. For many families, it acts as forced savings. So you see them do things like fix their broken down car, or make other capital investments. But, we think across a number of dimensions having that money come in at a more regular basis, every other week, once a month, makes a lot of sense. And would help families maybe escape debt or things like that. One thing that you hear is, "Oh, I like to get my EITC check because then I can pay down all of my debts." We're like, "Well, wait! No, but if you got this in a smooth manner across the year, maybe you wouldn't be in debt, and you wouldn't have to pay down your debt at the end of the year."
So one problem though is for a long time they tried an experiment with what they call, the Advanced Earned Income Payment. And just a fact about wages and earnings in this part of the income distribution, is you can't predict what your annual earnings are going to be all that well. There's fluctuations across months, maybe you've got a busy season and a light season, or you experienced some periods of unemployment. And what that means is sort of in any one month, you can't predict all that well what your annual EITC payment would be. So therefore if I say, "Okay, I'll take last year's EITC payment divided by 12, and give one of those to you every month." A lot of times then at the end of the year, people were getting too much EITC and then they would have a large tax bill. Nobody likes a large tax bill, especially families that are really struggling to make ends meet.
Steven Dean:
That could be a real problem.
Diane Whitmore Schanzenbach:
Exactly, exactly. So what we need is more more ways to make sure that families also have a stream of reliable income coming in every week, every month. Kind of the frequency with which you buy groceries and pay rent, not just the annual piece.
Steven Dean:
No, it's interesting because from a tax lawyers perspective, the notion of an annual cycle makes perfect sense. For most taxpayers and annual cycle also makes sense, but at low wage levels that's a long time.
Diane Whitmore Schanzenbach:
Right. There's just more fluctuations.
Steven Dean:
Yeah.
Diane Whitmore Schanzenbach:
So, for you and me, if you multiply our monthly income by 12, that's a pretty good proxy for what our annual income is going to be. But that's just not the case for families that are eligible for the EITC. So as a result, we think that other policies that come alongside this, maybe that are not part of the tax code are very important. Like SNAP, what used to be known as the Food Stamp Program, which gives low income families a monthly budget for food. A lot of people are excited about a monthly child allowance, to be paid either to low-income families. Or universally something like this, but I think many of those potential programs need to be outside of the tax code.
Steven Dean:
So, I think we both agree that there's something wonderful about using the tax law in this way, and also something less than perfect.
Diane Whitmore Schanzenbach:
Yeah.
Steven Dean:
One of the great things about having a less than perfect tool for accomplishing a goal is sometimes you learn interesting tidbits because of those imperfections. You're able to measure or see things that would be invisible if you did it right.
Diane Whitmore Schanzenbach:
That's right.
Steven Dean:
Are there interesting or useful bits of information we gather because of the sort of unusual way that these benefits are delivered via the tax law?
Diane Whitmore Schanzenbach:
Yeah. So I've got two sort of favorite stories, maybe three. But one, is we find that when families get this bonus payment the quality of the food that they buy goes up, right? So they're buying more fresh fruits and vegetables. They're buying more lean protein, things like that. Grocery items that are a little bit more expensive, are better for you. That dissipates quickly, but when families have more money in their hands, they go out and buy healthier foods. So that's one.
A second very interesting finding is that when you have an EITC payment and you're an expectant mother, and it comes in the third trimester—that third trimester is extremely important for birth weight, for sort of like the finishing touches on a fetus—what you find is that then birth weights go up. Birth weight itself has a lot to do with later life health. So this is a very interesting finding, also very upsetting finding. We should be making sure that pregnant women have enough food to eat throughout their pregnancy, whether or not, their third trimester is around the time of EITC payment. Nonetheless, we could do research and use this lumpy payment to understand science a little bit better, so that then we can design better programs.
Steven Dean:
That's really incredible.
Diane Whitmore Schanzenbach:
Right.
Steven Dean:
As you say, we never would have learned that had we been doing it right?
Diane Whitmore:
That's right.
Steven Dean:
Which is a troubling and great all at the same time.
Government policy is designed to help people have to grapple with the unavoidable reality that people are not perfect. Even minor changes in the way programs are designed can affect whether they reach those individuals and families that government wants to help.
Diane Whitmore Schanzenbach:
One of the policy changes was that they made just a portion, a small portion, I would say of unemployment insurance benefits non-taxable. As a result, more families, more individuals took up unemployment insurance. So why is that? Why would such small, a small change push more people over into taking up this benefit? A lot of that comes down to psychology, right? But as an economist, I think about, there are costs and benefits to signing up for social programs. When the benefits go up, it's more worthwhile to deal with the hassle of having to go down to the benefits office, fill out the forms, et cetera. There is a distaste for doing those things.
Steven Dean:
Did you have a sense of which of the two predominate? Or was it more the sort of certain psychological hurdle you overcame with the more attractive benefits? Or was it just a purely rational decision?
Diane Whitmore Schanzenbach:
Well, I'm an economist. It's hard to disentangle those two, but I basically always think that people respond to incentives. And when the benefits go up you're more likely to respond to that. Frankly, we just bought an electric car because of the tax credit. It was perfectly rational, but it's just one of many, many examples of, when you put incentives into the tax code, or other public policies, people respond to them. Not everybody, but lots of people do respond.
Steven Dean:
It does seem, there is some research on this that people do respond differently to a tax incentives than they would to another kind of more direct spending.
Diane Whitmore Schanzenbach:
Exactly.
Steven Dean:
Some of it is just a political orientation that they feel more comfortable taking advantage of a program if it's framed as just keeping your own money rather than taking a government handout. Even though mathematically, it doesn't change all that much.
Diane Whitmore Schanzenbach:
Exactly. Exactly.
Steven Dean:
As an economist, are you okay with that? That people have this less than perfectly rational response to different forms of government spending?
Diane Whitmore Schanzenbach:
Well you know that keeps the psychologists in business, right? It's been really interesting to see how economists and psychologists are working together to better understand human behavior. We certainly know that this perfectly rational worldview that we have is not correct. But it's a reasonable framework for many cases. But then it's been tremendously interesting to learn from what happens if we reframe this in a particular way? Then how can we use that to deliver better benefits, or improvement incentives and so on.
Steven Dean:
And healthier babies-
Diane Whitmore Schanzenbach:
Exactly.
Steven Dean:
I mean, one of the things I've learned from your research is that the stakes are high.
Diane Whitmore Schanzenbach:
That's right.
Steven Dean:
The differences in the work you do on investments in children, that's a very interesting way of putting it. Because you can see that these slightly minor, these sometimes minor changes can really affect a whole life. That's really important.
Diane Whitmore Schanzenbach:
That's exactly right. The stakes are much higher than we previously understood when it comes to children. And that means that we need to do our best to protect them when there are economic downturns. I think a lot of us are concerned that we're going to face an economic downturn in the coming year or so. And children, especially at certain sensitive ages, that experienced family income losses, will be damaged by this. And those damages will be measurable across their entire life. They'll grow up to be less healthy, less economically self-sufficient, less productive. That suggests to me that we need to be throwing a lot more resources at trying to make sure that there's insurance against that for kids, especially.
Steven Dean:
So your work, I am just so delighted to learn more about the work you do. It's really incredible. The work you do I think highlights the best part of the tax law, where we actually help families. That's wonderful. And so that's maybe the part of it we're most proud of. And I would say, I'm going to ask you now a question it is about the part of the tax that we're probably least proud of. The stakes here are not quite as high, but they're pretty high. If you get the answer right, you are going to go home with this very fine, NYU Law Graduate Tax Program pencil. So a lot rides on this, a lot rides on this.
Diane Whitmore Schanzenbach:
I like that it's purple. We at Northwestern really like purple things. So-
Steven Dean: Purple is important-
Diane Whitmore Schanzenbach:
I would like that. I would like that pencil.
Steven Dean:
Let's see what we can do to get this for you.
Diane Whitmore Schanzenbach:
All right.
Steven Dean:
Let's see what we can do to get this for you. So, the good work that tax law does is helping people, and collect revenue for the government. But sometimes we do it in a way that is not... Well, it's a little silly. So the world of international tax is generally fairly sophisticated field and not something you'd probably spend a lot of time in. But I am going to test maybe your intuition on this. You wouldn't know how sophisticated international tax law is sometimes simply by looking at the terms we use.
So I'm going to give you a list of possible terms that international tax rules might use in describing the process of determining whether a taxpayer is eligible for what's called a foreign tax credit. So that's a US tax credit for foreign taxes paid. Of course, it's a little crazy we do that at all. We really have brought a credit, a US credit for taxes paid to a foreign government. So the options are at least one of these is a term that's actually used in international tax law in the foreign tax credit area. Is it either A). Blending; B). Baskets; or C). Both blending and baskets?
Diane Whitmore Schanzenbach:
Hmm. These are difficult questions. I know really nothing about international tax, but it does not seem like something that tax people do to use two different terms for the same concept. So that may... Oh, what do you think?
Steven Dean:
You know-
Diane Whitmore Schanzenbach:
I feel like we're having a, "Wait, wait, don't tell me.", moment here.
Steven Dean:
I think we love using lots of terms. I'm not sure where we come up with them all. But I guess the question I would encourage you to think about is, do you think either of these terms are too silly for tax people to use and what should be a very sober, serious context?
Diane Whitmore Schanzenbach:
Oh, certainly neither is too silly. My intuition would have been that this is about baskets.
Steven Dean:
That's certainly sounds right to me, but-
Diane Whitmore Schanzenbach:
Do they also use blending? I think the answer might be yes.
Steven Dean:
So you're right. The pencil is yours. We talk about both blending and baskets. So I'm going to-
Diane Whitmore Schanzenbach:
Thank you!
Steven Dean:
... read you a sentence from... I chose this in part-
Diane Whitmore Schanzenbach:
Very nice.
Steven Dean:
... because it was totally unfair, and I knew you knew nothing about international tax. But also this is from an article by one of your crosstown rivals at Chicago.
Diane Whitmore Schanzenbach:
Hmm?
Steven Dean:
Is there a rivalry? Is that a thing, or not really?
Diane Whitmore Schanzenbach:
I've never heard of this other school that you mentioned.
Steven Dean:
Oh, okay. So it's a little school the University of Chicago. You might pass by it sometime on the highway. So it's Julie Rolin, "Rethinking Tax Treaties in a Strategic World with Disparate Tax Systems", from the Virginia Law Review in '95. This is a sentence from the article. She says, "Cross crediting or blending within this basket is made virtually impossible by provision excluding from the basket, highly taxed income of the type otherwise included in the basket." So this is a real sentence that actually makes sense to me.
Diane Whitmore Schanzenbach:
It does make one want to go to law school. Doesn't it?
Steven Dean:
Not everybody. I'm not sure everybody who hears this is going to run off to law school. I think some are going to respond to that. Some are going to respond to what you've described as a very important system for supporting the most vulnerable. I don't think that's what a lot of people think about when they think about the tax law. But those of us who spend way too much time thinking about tax knows that it goes from this incredibly sophisticated part of the world of basketing and blending, ] to this very important part of the world helping families and vulnerable children. To those of us who are really hardcore tax nerds, we care about all of it. But I am so grateful to you, Diane, for coming in and talking to me today. I had a great time talking to you. I learned a lot by looking at your work, and I encourage everybody who hears this to do the same, because what you're finding out I think is really important. So thank you very much.
Diane Whitmore Schanzenbach:
Thanks for having me.
Steven Dean:
Thank you for listening to The Tax Maven. I also want to give a very special thank you to those that helped make the podcast possible. Patrick Kelly, Joe Rivera, Greg Addison, Rebekah Carmichael, Jill Rachlin, and Anthony Pietrangelo, and thank you, Rachel Burns. The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web, visit our graduate tax program website, to see the different programs we offer both in-person and online, both for lawyers, and non-lawyers. Take a look at what we offer and I hope you consider joining us. Now we like to end each of our episodes with a quote about taxes read by one of our students. Today's tax quote is from Aly Mariani from St. Louis, Missouri.
Aly Mariani:
"The tax law is the primary link between the nation citizens and their government. Many more people file tax returns than vote in presidential elections."
Steven Dean:
Please email us at info@taxmavenpodcast.com, if you have any questions, or comments, or suggestions. If you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.