Policies to Help Address Income Inequality

This is an article I wrote that originally appeared on PolicyMic. It was part of a debate about Income Inequality in this country.  You can read the other side of the debate here.

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 beeven 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.


Debit card swipe fees cut, are there still problems?

Today the Senate voted down a bill by Sen. Jon Tester (D-MT) that would have delayed the Durbin Amendment from the Dodd/Frank bill.   Sen. Richard Durbin’s (D-Ill) amendment puts a cap on the swipe or interchange fees that banks charge merchants for accepting debit cards.  Banks have been charging on average  44 cents or up to 2% of transaction  for every transaction, bringing in about $16 billion in revenues.  Merchants often will increase their product prices a bit to make up for this lost revenue.  The amendment would cap the fee at about 12 cents a transaction.  This will drastically cut the additional revenue that banks are bringing in.  The merchants believe that these lower costs will allow them to slightly lower prices, since they will not be hit as hard with the fee.

In theory, this seems like a great idea.  Why not cap these fees and limit banks from additional profits, while allowing prices to go down.  However, there are some other factors that make everything not so perfect.  In fact, I was not in support of the amendment as written for several reasons.  First of all, banks don’t like losing revenue.  They are going to find ways to make this money back.  One way is they could go back to pushing credit.  This amendment applies to debit cards and not credit cards.  Therefore, banks can scale back on their advertising of debit cards and move back to pushing using your credit card as a way to get these fees back.  Another option for the banks are to add new fees to accounts.  Banks love adding new fees and have already begun to phase out the free checking.  They are creating new fees for services to make up for places they are losing revenue, and this could lead to more of that.

The more troubling factor here could be the impact on prepaid debit cards. For low wealth families these are a growing alternative to traditional banking options.  In the Durbin Amendment, there is a cap exception to small banks with under $10 billion in assets.  The idea is that these smaller banks and institutions don’t have the same capacity of the big banks to deal with a fee cap and therefore are exempt.  This creates an interesting dilemma in the prepaid card market.  Pretty much every prepaid card provider fits under this exemption.  In fact, Russell Simmons, creator of the Rush Card, fought for this exemption in order to protect his profits.

This may not be a good thing though and could create problems for users of this card.  These prepaid providers can continue to charge much higher fees than the big banks can putting the merchants in a tough place.  Merchants would rather pay the lower fee to everyone because it benefits their bottom line, but this exemption means they will still have to pay the higher amount for a number of transactions.  Merchants may start to not accept prepaid cards so they don’t have to pay the higher fee.  Another option is they could charge a fee to users of these cards to make up for the higher costs.  No matter which option they choose, low-income users of this card will have to pay more for the purchases than those who use traditional bank debit cards.  I don’t like the potential impact this could have on poor people.  Why should they have to pay more so people like Russell Simmons can protect their profits?  I guess in order to avoid higher costs they could always go back to using check cashers and carry more cash.  Oh wait, that also carries a high cost.

Some of you may say, well they can go back to using a traditional bank, and that is a fair statement.  However, most low wealth people do not generate enough income to have low fee accounts now that banks are doing away with free checking.  So as I stated earlier, banks will create new fees for accounts that are used by low wealth individuals.  There is no way around the fact that this amendment raises the costs on low-income individuals.