In this era of justified public cynicism about our political process, let’s give the politicians credit when they get it right. The Illinois General Assembly got it right last week when it voted to double the state’s earned income tax credit (EITC) as part of the tax package. Governor Quinn got it right when he insisted on this.
The EITC, a refundable tax credit to low- and middle-income workers, is critical for achieving tax fairness. It is also one of the best ways to stimulate economic growth and job creation. Given the anemic performance of our economy, nothing is more important than that.
The EITC is a cost effective way to stimulate economic growth and job creation because businesses grow and hire new workers when they see increased demand for their products. Wealthy people, given an extra dollar, are likely to save it, while low- and middle-income people are much more likely to spend it. This spending increases demand, spurs economic growth, and creates jobs. That’s why the non-partisan Congressional Budget Office estimates that providing refundable tax credits like the EITC for low- and middle-income households creates two to three times more jobs and economic growth than extending the Bush II tax cuts.
Increasing the EITC also makes our tax system fairer. Over the past 30 years, the wealthiest 20% of Americans have seen their income grow by 95% compared to only 25% for everyone else. For the wealthiest 1%, it’s even more dramatic—their income has grown by 281%, and they’ve gotten 58 cents of every dollar of economic growth generated over the past 30 years.
The last thing our tax system should do is make income inequality worse. But due to our over-reliance on sales taxes and other factors, low-income people in Illinois spend over 13% of their income on state and local taxes, while upper income people spend less than 6%% of theirs. Increasing the EITC helps redress this imbalance.
It is unconscionable that nearly 100,000 people in Illinois who work full-time, year-round still live in poverty. The EITC is a cost-efficient way to encourage work and help these and other low-income workers make ends meet. It also lifts more children out of poverty than any other tool.
Now that CME and Sears have demonstrated that holding a gun to the politicians’ heads works, we can expect a parade of “too big to leave” companies to visit Springfield with their hands out. Maybe some, unlike CME, will say thank you and promise not to take the money and run. We can also expect a new round of across-the-board corporate tax giveaway proposals. Perhaps the taxpayers will even be asked to subsidize multi-millionaires directly, such as by the increase in the estate tax exemption included in this week’s tax package.
The important thing to remember, though, is that George Bush I was right when he called this voodoo economics. The EITC is not just about fairness, lifting full-time workers and children out of poverty, and reversing the 30-year trend of greater income inequality. It’s also about tax policy that will lead businesses to grow, create jobs, and make the economy work for all of us.