As I documented in my last post, many American workers who qualify for the earned income tax credit (EITC) end up spending most of their tax return in the course of a few months, or using it to cover the debts they’ve accrued in the past year. Either way, their finances follow an annual boom-and-bust cycle. In this piece, I’ll describe three ways to remedy this problem: a wage subsidy, an advance EITC payment option, and a deferred EITC payment option.

Wage Subsidy

Oren Cass, a senior fellow at the Manhattan Institute and the domestic director of Mitt Romney’s 2012 presidential campaign, proposed replacing the EITC with a wage subsidy that would show up directly in a low-wage employee’s regular paycheck. Rather than receiving one lump-sum payment at tax time, the worker would enjoy higher wages throughout the year.

Here’s how it would work. The subsidy would be calculated using a “target wage” for reference, with the subsidy closing half the gap between the market wage and the target wage. Cass notes that the target wage “could be set nationally or, in keeping with proposals for minimum-wage reform, depend on local market conditions—equal, for instance, to 60 percent of the median wage in the local market. In a market with, say, a median wage of $20/hour, the target wage would be $12/hour.”

So, for instance, when a person takes what is now an $8-an-hour job at McDonald’s, the federal government would top it off by $2, thus creating a $10-an-hour job. If the person gets a raise from McDonald’s to $10 an hour, he would receive an $11 hourly wage with the subsidy. When he earns $12 an hour from his employer, he would no longer receive a subsidy, but importantly, he would still be earning more money than he was at the subsidized wage of $11 an hour. Just as important, one’s subsidy would not depend on the number of hours one worked (though rules would need to be implemented governing overtime hours).

A wage subsidy offers several benefits over the EITC’s lump-sum payment. For starters, low-wage workers would have more money at their disposal throughout the year, perhaps better enabling them to pay monthly bills on time and avoid borrowing from the payday lender or family and friends—and the stress that comes with it. The dignity of a person’s work would be reflected in every paycheck, rather than through a once-a-year tax refund. Childless adults who today receive a very small EITC would receive the subsidy, and it would eliminate marriage and work penalties. In addition, while about 20 percent of Americans eligible for the EITC do not claim it, there would be no awareness problem with subsidies: anyone who takes a low-wage job would automatically receive a wage subsidy. And, unlike the minimum wage, a wage subsidy would theoretically create an incentive for employers to hire the less-skilled and less-educated rather than replacing them with a machine.

A wage subsidy offers several benefits over the EITC’s lump-sum payment.

There are possible downsides to Cass’s proposal, some of which could be addressed through other policies. Take the case of Lance and his family, whose story I told in my last post. Whereas a large family like theirs would receive about $6,100 through the EITC if Lance worked full-time at $12 an hour, under this proposal, they would likely receive no subsidy. However, as Cass points out, situations like his could be at least partially remedied by expanding the child tax credit. We could even take a cue from Canada and consolidate that credit with other child-related benefits, as Josh McCabe has proposed in this space, and distribute it as a monthly payment.

But perhaps the most serious concern with a wage subsidy is the message that it could signal to employers. As Ken Jacobs, chair of UC Berkeley’s Center for Labor Research and Education, suggested, it would create a tremendous incentive for employers to pay (even) lower wages than they currently do. A few months before Cass published his proposal, Jacobs and a few colleagues released a report showing that more than half of all state and federal spending on public assistance programs goes to working families. As Jacobs put it, “American taxpayers are subsidizing people who work—most of them full-time (in some cases more than full-time) because businesses do not pay a living wage.” Cass’s proposal could enable more businesses to pay poverty wages and therefore deepen the already significant public costs.

Advance EITC Payment Option

As an alternative to Cass’s idea, there are ways to mitigate the boom-and-bust problem of the EITC within the current structure. In a recent Brookings paper, Steve Holt described proposals to provide alternative payment options for the EITC, which fall into three categories: accelerated disbursement, early advance, and deferred savings.

Most notably, in 2008 Holt proposed an option for advanced payment of a portion of the EITC on a quarterly basis. (Note that his proposal differs from the old option of receiving one’s EITC in advance through each paycheck. The option was eliminated in 2010, in part because of extremely low take-up rates.) Holt’s proposal inspired several experiments. For example, the city of Chicago implemented a pilot project that offered 343 public housing residents the option to receive 50 percent of their expected EITC in advance through quarterly payments. The results of that project point to both the promises and perils of a periodic payment option, particularly an advance payment option.

The promising news is that workers who received quarterly advance payments of their EITC through this project expressed more interest in the option than a control group that did not receive advance payments. Specifically, when the project concluded and participants had filed a tax return and received a smaller refund because of the quarterly advance payments, 90 percent of participants said that they would prefer the method used in the experiment, rather than the traditional method of receiving a lump sum at tax time or other alternatives. In the control group, only 55 percent expressed interest in a periodic payment option (whether advance or deferred).

Moreover, evaluation researchers found that, compared to the control group, participants who received the advance quarterly payments were better able to pay their bills and afford things like childcare and education or training, and they were less reliant on payday lenders and loans from family and friends.

The downsides of the advance payment option are in the details. For instance, it requires participants to predict their income for the next year, as well as the number of dependents that they will claim at tax time. Both of those things can be hard to predict for low-income Americans, whose jobs and families are often fraught with insecurity. The simplicity of one lump-sum payment, which involves no risk of owing the government anything, is one reason that many recipients like it. By contrast, the complexity that an advance payment necessarily entails is surely a reason that the old option of advance payments distributed through paychecks never caught on, and it’s one reason to be skeptical that Holt’s modified proposal would be a big improvement on the current method.

Deferred EITC Payment Option

What about the idea of receiving deferred EITC payments?

In It’s Not Like I’m Poor, an inquiry into how the EITC affects 115 Boston recipients, Sarah Halpern-Meekin and colleagues propose that, at tax time, recipients have the option of deferring at least a portion of their EITC that would be paid out on a regular basis (monthly or quarterly) throughout the year. Should recipients elect the deferment option, they would receive a modest bonus with each regular installment of their deferred EITC. The authors suggest that deferring half of the refund should be the default option (those who wanted the full credit at tax time would have to consciously opt out). Workers could also defer a portion of the EITC indefinitely (rather than having it all distributed to them over the course of the year), with interest, if they wished to “save” their money with the government rather than with a bank.

For instance, under the default option, a family that receives a $6,000 EITC would receive $3,000 at tax time and have the other $3,000 distributed to them in monthly or quarterly payments during the rest of the tax year. Thus when Christmas comes around, the family could expect (for example) a quarterly payment of $750. Alternatively, that family could also choose to keep $1,000 of their deferred credit in an interest-accruing account and receive $2,000 in regular installments throughout the year. Or, if the family had only minimal expenses and debts they had to pay at tax time, they could elect to defer the vast majority of their EITC check and receive even larger installments throughout the year.

As I see it, the deferred payment option merits further consideration because of its several advantages: it retains the simplicity of the current EITC structure (there is no need to predict one’s income a year in advance), encourages some disbursement of the payment throughout the year (therefore empowering recipients to meet needs as they arise), encourages savings, and doesn’t provide a direct incentive for employers to pay low wages (as a wage subsidy might).

The simplest solution to low-wage workers’ financial difficulties is the most free-market solution.

Still, let’s not forget that the simplest solution to low-wage workers’ financial difficulties is the most free-market solution: businesses volunteering to pay their workers higher wages. This is beginning to happen, to some degree. For instance, in 2015, Walmart announced that all employees would receive a wage of at least $10 an hour (though for a company that still makes $3 billion a quarter and can afford to give its workers a significant raise, that should just be the start).

In the pages of the New York Times last year, former marketing conglomerate CEO Peter Georgescu urged his fellow business leaders to increase workers’ pay. He reported that he and Home Depot founder Ken Langone had been meeting with chief executives, urging them to take the lead in tackling inequality. And after New York Governor Andrew Cuomo raised his state’s minimum wage to $15, Langone, a GOP mega-donor, said that while there were “tradeoffs” to raising the minimum wage, he was “in lockstep philosophically with the fact that we’ve got to raise wages” for low-wage workers. If more business leaders joined Langone, it would send a powerful message that work pays and ultimately enable less dependence on government programs like the EITC.

Without a doubt, the EITC is invaluable for many Americans, but in its current shape it has serious flaws. No working family should have to live with the stress of a boom-and-bust budget. As the authors of It’s Not Like I’m Poor detail, although the EITC’s lump-sum payment theoretically provides a “forced-savings” mechanism, the reality is that because of poverty-level wages, few recipients can devote their payments to long-term savings and needs, and a few months after receiving their tax refund, many return to just trying to survive. We can do better. No reform proposal is without some drawbacks, but each of the ideas mentioned in this piece deserves further scrutiny and debate.