Aiming to encourage work in the formal economy while neutralizing regressive consumption taxes, the Center for a New Economy recently commissioned the Urban Institute in Washington D.C. to conduct a study that proposes a new work credit focused on working families with children making between $7,500 and $25,000.
It is estimated that the new credit — proposed within the context of an overall tax reform the government of Puerto Rico is currently developing — would benefit between 119,000 and 128,000 working families, especially those in the lower income scale, according to the study entitled “A work tax credit that supports Puerto Rico’s working families,” unveiled Thursday by the CNE’s Espacios Abiertos initiative.
A work credit equivalent to 8 percent of the annual income of a household that earns the minimum wage would result in a maximum credit of $1,240.
“For a family whose head of household works all year earning the minimum wage, this credit is the equivalent of a month’s work and would match what they pay in payroll taxes [wage deductions for contributions to Social Security and Medicare,] said María Enchautegui, senior associate researcher of the Urban Instititute, and author of the study.
“The cost of this credit for the government would be between $125.7 million and $134.9 million, depending on phased-in credits and the rate at which the credit decreases after reaching the maximum,” said Enchautegui, an expert on immigration and working conditions for low-income workers.
The study recommends that any work credit legislated be flexible enough in its design and implementation to accommodate changing fiscal circumstances, expansion to other population groups, or an increase in benefits.
Discussions on tax reform in Puerto Rico point to the adoption of a value-added tax, at higher rates than currently in effect, the elimination of income taxes for the majority of Puerto Ricans, and a refund of VAT to certain families.
Espacios Abiertos believes the adoption of the reform increases the importance of the proposed work credit, since it not only neutralizes the regressivity of the consumption tax increase, but also reduces the economic needs of poor families, promotes employment in the formal economy and eases the burden of payroll taxes paid by low-income working families.
The federal work credit program is considered the most effective anti-poverty program that exists in the U.S., said Sergio Marxuach, public policy director for the CNE.
“Studies on its effectiveness have found that it functions as an incentive to work, increasing labor participation and job commitment by those who receive it. At the same time, it has been shown that it is important to income and helps to move a large number of families above poverty level,” he said.
The study will be sent to the Treasury Department, as a proposal, said Espacios Abiertos Executive Director Nuria Ortíz-Vargas.