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"Earned income-tax credit (EIC) is an effective means to help reduce poverty. This can be seen from a comparison of EIC with other policy measures. |
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Seventy percent of the benefit afforded by a system of EIC for low-income families with children would reach the lowest three income deciles. Those same deciles would gain just 30 percent of the benefit if the rate of VAT on food were reduced, 20 percent of an overall reduction in VAT, and 19 percent if the lowest health tax bracket were replaced by income tax. |
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Earned income-tax credit is a central policy instrument that would deal with the growing incidence of poverty among families with a wage earner. It would raise the disposable income of wage earners without undermining the competitiveness of Israeli manufacturers." |
| "From the mid-1990s till 2002 inequality in the labor market grew, expressed by a reduction in the relative wage of low-income earners, a continuous rise in their rate of unemployment, and an increase in the population of those dependent on the welfare system. As a result there was a gradual decline in participation rates in the labor force on the one hand, and a rise in the incidence of poverty among the working population on the other. These processes were reflected by a steady rise in the share of income of the poor that derived from welfare benefits, while the share of earned income declined." This was stated by Dr. Karnit Flug, Director of the Bank of Israel Research Department, today at the Herzliya Conference. In Dr. Flug's opinion, the challenges currently confronting economic policy are to absorb those joining the labor force into employment, and to raise the return to labor for those with low levels of education so that employment would guarantee a reasonable standard of living. |
| Speaking of raising the return to labor in the labor market for those with low levels of education, Dr. Flug said that earned income-tax credit is a central policy instrument that would deal with the growing incidence of poverty among families with a wage earner. It would raise the disposable income of wage earners without undermining the competitiveness of Israeli manufacturers. Dr. Flug listed the main aspects of the proposed earned-income-tax-credit system: |
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The credit would be conditional on the joint income of the couple being below a certain level and on family structure (relief only to families with children). |
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The credit would be conditional on the wage being above a certain level, or on the wage earner working at least a certain number of hours a week. |
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In implementing the system, it would be important to ensure that the payment is made directly from the government to the worker, and not via the employer. |
| Dr. Flug compared the EIC system to other policy instruments that have been discussed in relation to the war on poverty, from the aspect of their effectiveness in focusing the benefit on the poor, and in particular the working poor. |
| The comparison showed that of the various policy instruments examined, EIC is the most effective in helping low-income earners, and thus also in reducing poverty. With an EIC system for low-income families with children, 70 percent of the benefit would reach the lowest three income deciles. Reducing VAT on food would affect all income deciles in a similar manner. An overall reduction of VAT provides more benefit to the upper deciles, while only 20 percent of the benefit would reach the lowest three deciles. Replacing the health tax with income tax in the lowest bracket helps mainly the middle strata, with only 18.6 percent of the benefit reaching the lowest three deciles. |
| In addition to the adoption of EIC, Dr. Flug proposed extending the subsidy on labor-support services such as day-care centers, pre-kindergarten nurseries, and transportation to work, and enhancing the skills of those with low levels of education by improving the systems for completing education and retraining. "In the longer run the education system must provide the skills needed for future employment to all sections of society," said Dr. Flug. |
| Referring to the range of programs for reducing poverty, Dr. Flug stated that only sustainable growth could help raise the standard of living of the whole population and create the resources that would also enable treatment to be focused on those left behind. To support continued growth it is essential to adhere to the strategy of reducing the shares of public expenditure and debt in GDP. The implementation of the range of means for combating poverty, which would require the allocation of resources, would call for a significant change in the order of priorities in the budget. |