With the recent news that the poverty numbers in this country have risen, combined with earlier reports of a widening wealth gap, it is clear that we have an issue with income inequality in this country.
Some will argue that the income inequality is overstated. Others will say that policies designed to minimize the inequality do the exact opposite and negatively impact the poor. However, the real problem is a lack of both financial literacy and the right policies. While income inequality is a product of our system and will always be here, if we couple financial literacy with good policy, then the impact of this inequality can be minimized and have a positive impact on the poor.
The widening wealth gap and the poverty numbers are enough evidence to show that income inequality in this county is not overstated. I want to focus on the policies that are designed to minimize their impact. I will admit that every policy may not be a good thing, while others are debatable. For example, I don't think the government should be in the business of supplying cell phones, and policies like the minimum wage are debatable.
The Earned Income Tax Credit (EITC) is a refundable tax credit for low-income families that was enacted in 1975. In a nutshell, this is a program that is designed to incentivize work. It accomplishes this by decreasing the tax burden on wages and also serving as an income supplement through the refundable portion.
Recent numbers show that this program pumped nearly $59 billion back into the economy through low-income families. Even with the poverty numbers rising, the numbers would be even worse without the EITC. This program is further enhanced by 23 states that have varying state versions of the credit, meant to increase the positive impact on low-income families.
While this program has been proven to help people stay above the poverty line, it also shows a glaring weakness in the system. Simply providing an incentive to work through refundable tax credits is not enough. A glaring problem in this country is the lack of financial literacy. The lack of literacy can also be felt in our housing crisis. Families looking to purchase homes compensated for their lack of financial wherewithal by trusting brokers to help them wade the waters. These brokers were focused on their bottom line and not on educating the borrower. This led to loan steering into sub-prime mortgages, because once the loan closed, the broker was off the hook.
An increased investment in financial literacy would have not only helped in avoiding the sub prime crisis, it would also help make successful programs like the EITC even better. The credit maxes out at $5,666, and for a low-wage worker, that is more than they bring home in several months. With little emphasis on financial literacy, it is unrealistic for us to expect every dollar to be spent wisely. However, with a greater emphasis on financial education, families could learn how to better utilize these dollars to minimize the impact of their lack of income.
In North Carolina, the state version of the EITC came under attack during the budget debates. However, even Republican house members had a hard time advocating for the elimination of the refundable portion of the credit, because they had to admit it was an incentive to work. Even those that think eliminating the wage floor and paying lower wages to increase employment would benefit from a program like this as an additional incentive for people to accept these lower wage jobs. I am still not advocating for eliminating the minimum wage but instead want to show the versatility of good policy designed to help the poor.
One thing that all sides of this debate can agree on is that there is income inequality in this country. Even if one side will not admit it, the wealth and poverty numbers support the fact that this inequality is real and not overstated. The fact is that income inequality will always be here and is a product of the capitalistic nature of our society. Even with some questionable programs out there, policies are needed to help limit the impact of the earning disparities that exist.
The EITC is an example of good policy that helps disprove the theory that policies designed to minimize the impact of wealth disparity hurt the poor. When we incorporate financial literacy with programs like the EITC, we won't eliminate income inequality, but we can help to minimize the impact on low-income workers.
Photo Credit: Ed Yourdon