Paul Ryan

Obama's Plan to Help the Poor is to Make Government Bigger. Paul Ryan's Plan is to Make It Better.

Both want to expand the Earned Income Tax Credit (EITC). But Ryan's plan would reform the system rather than grow it.

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Whitehouse.gov

Of all the proposals offered by the White House in this year's extended State of the Union related activities, the one to which I'm most sympathetic was not mentioned by name in the speech.

It's an expansion of the Earned Income Tax Credit (EITC)—a tax credit for the working poor that was put in place in 1975 and expanded several times in the 1980s and 1990s.

Obama proposed expanding the program in a White House document released over the weekend that described an array of tax hikes and other changes, and his State of the Union address mentioned briefly that his budget would lower "the taxes of working families and putting thousands of dollars back into their pockets each year." But it hasn't been a major focus of discussion.

It is, however, a major budget item. The EITC is the third-largest federal assistance program for people with low incomes, and it is a kind of conditional variant on Milton Friedman's idea of a negative income tax: Workers at the low end of the income spectrum get a refundable credit tied to income earned with work; because it's fully refundable, it means that workers get the full credit even if the amount exceeds their tax liability.

There are serious concerns with the EITC: Notably, it has a 24 percent improper payment rate, which is unusually high even for a major federal program. The spending controls, to the extent that they exist, are clearly flawed. But even still, it's widely regarded as an effective way of moving people into the workforce and thus increasing their incomes, moving millions of children out of poverty and into the lower middle class each year. It's also a much better way of targeting genuinely needy low-income individuals than increases in the minimum wage.

For those who believe that tax rates affect behavior, this won't come as a surprise; the EITC offers a major tax incentive for people at the bottom end of the income spectrum to work, and in that sense is substantively different from many other assistance programs that simply offer a benefit.

Obama's support for expanding the EITC isn't new—he published a lengthy proposal for expanding it last year. But even still, it's at least a little odd that the president didn't stress this idea even more. Not only is it exactly the sort of "middle class economics" policy that he spent this year's State of the Union touting, it's also one of the few places where he might be able to find common ground with Republicans in Congress.

Ronald Reagan enthusiastically expanded it in 1986, calling it "the best antipoverty, the best pro-family, the best job creation measure to come out of Congress." And more recently, Rep. Paul Ryan (R-Wisc.), one of the GOP's most powerful domestic policy agenda-setters in Congress, has called for further expansion of the credit as part of the suite of anti-poverty policies he put forth last year.

Unsurprisingly, Obama's proposal and Ryan's differ, especially in their funding mechanisms. Comparing the two proposals is instructive.

In some sense they mirror each other. Neither were built with the expectation that they quickly would become legislative reality. Both are paid for with funding mechanisms that members of the other party are likely to oppose. Obama would expand the credit with new tax revenue, while Ryan would pay for his expansion by cancelling several other programs, including Social Service Block Grants, the Economic Development Administration, and the federal Fresh Fruits and Vegetables program.

But even this brief comparison reveals the major difference between the two proposals: Obama wants to make federal aid programs bigger; Ryan wants to make them better.

Indeed, Ryan's proposal sets the expansion of the EITC in the broader context of reforming the safety net and helping the poor (there's even a criminal justice component), and it addresses a number of concerns about the EITC while offering a variety of ideas to make it more effective and streamlined.

A common complaint on the left, for example, is that qualifying for the EITC is unnecessarily complicated—an extensive paperwork hassle that poses an even bigger burden on the folks who need the credit the most. Ryan's plan notes this, agrees, and then suggests simplifying delivery of the EITC by putting it directly onto paychecks. That, in theory, should bolster the link between work and the credit, making it more effective. Ryan's plan also argues that reducing the complexity of the qualification process would reduce fraud and other improper payments, and proposes sharing savings generated by reducing bad payments with beneficiaries—meaning that boosters of the EITC would have an incentive to reduce payment error.

In addition, Ryan's plan gives states more flexibility to implement various poverty programs, setting up a kind of contest system where states can innovate and compete to best deliver aid.

To be sure, there are problems with Ryan's poverty plan, of which the EITC is just one part: It calls for an army of nannying case-workers charged with guiding beneficiaries through a life plan, and it is probably too optimistic about what efficiency improvements can be achieved in government programs.

But it is an actual reform plan, designed to improve the overall performance of government aid by shifting resources away from bureaucratic boondoggles and into a program that has demonstrated its effectiveness while simultaneously exploring ways to address that program's existing problems.

Obama's plan, in contrast, is little more than an expansion designed to grow the program without regard to its problems or how it meshes with the rest of the government's aid programs. Its implicit definition of a better program is simply one that spends and does more.

That definition lends itself to a remarkably simplistic theory of government, in which programs that don't work need more funding to work better, and programs that do work need more funding to expand upon their success. It's this basic outlook that has resulted in a bloated federal government overrun with ineffective aid programs that are exceedingly difficult to cut.

Ryan's proposal offers a counter-theory, which is that programs should be tested and held accountable, expanded and tweaked if they work, but pruned if they don't. His plan isn't perfect, but it starts from the right assumption—that when it comes to improving government programs, more isn't necessarily better, but that, well, better is.