Five Figures to Consider
As millions of Americans compare their tax refunds (smaller than expected) to those of corporate giants like GM ($104 million), Halliburton ($19 million) and Netflix ($22.1million), many are more certain than ever that the 2017 Tax Cuts and Jobs Act was a #GOPTaxScam. Democratic politicians eager to plug into that anger are talking up proposals to fight inequality with new approaches like a wealth tax, a 70% federal income tax, a $15 minimum wage (see 5F’s The Minimum Wage Riddle) and a guaranteed universal basic income. Each of these ideas faces powerful opposition. Is there a middle ground in the inequality debate? Yes. Let’s take a look at an overdue expansion of the Earned Income Tax Credit (EITC).
First, bear with us while we explain the EITC, which is considered the most successful means-tested transfer program in the U.S. The EITC’s benefits are concentrated among working families with incomes between 75% and 150% of poverty level. To claim the credit, a person must earn income and file a tax return. The refundable credit is delivered through the IRS. In 2018, 25 million filers and their families received $63 billion in EITC benefits averaging $2,488. The program encourages work, is inexpensive to administer and has been shown to increase employment, improve educational and health outcomes and increase life-long earnings. Together with the Child Tax Credit, which is concentrated among higher-income earners, the EITC is responsible for a 25% reduction in child poverty.
Since its introduction in 1975, the EITC has been expanded by Republican and Democratic congresses and by the five presidents preceding Donald Trump. Last year, however, the EITC got left out in the cold. While the 2017 Tax Cuts and Jobs Act nearly doubled the Child Tax Credit to $2,000, the EITC was not increased. Moreover, its future growth was limited by tying it to a more conservative inflation measure. (Want to know who benefitted from the 2017 tax credit expansions? Consider that the Child Tax Credit phases out for married couples at $500,000 in income. In contrast, the EITC phases out for married couples with three children at $54,884 in income.) The shabby treatment of those eligible for the EITC was in spite of former House Speaker Paul Ryan’s support of a program expansion.
Current proposals to expand the EITC include the Grow American Incomes Now (GAIN) Act proposed by Sen. Sherrod Brown (D-OH) and Rep. Ro Khanna (D-CA). The GAIN Act would double the EITC for working families, add about 20 million new recipients and triple the credit for childless workers. (Brown is weighing a presidential run.) Another, the EITC Modernization Act, was introduced by Rep. Bonnie Watson Coleman (D-NJ) last fall. Coleman’s legislation would expand the EITC to include students pursuing higher education and the millions of Americans serving as unpaid caregivers.
Importantly, the proposals increase assistance to childless, low-income adults, a group that is largely excluded from the current EITC. Consider that for the 2018 tax year the maximum credit for a worker with no qualifying children is $529 compared with $3,526 for a filer with one child. The phase-out for childless workers also occurs much quicker than for parents of dependent children, disappearing entirely at around $15,000 in income. For childless adults, the credit does not significantly offset the cost of employment taxes. As a result, taxes push about 7.5 million adults ages 21 to 66 into poverty or deeper into poverty, according to a report by the Center on Budget and Policy Priorities.
Perhaps the most disadvantaged low-income childless adults are those ages 18 to 24. They are not eligible for the EITC, which kicks in at age 25. Recognizing that many young people are independent before reaching age 25, Rep. Coleman’s proposal would drop the EITC eligibility age to 18. In doing so, her plan would make three million Pell Grant eligible students also eligible for the EITC. (See 5F’s article on the plight of homeless college students in No Room, No Board.) Non-students need the assistance as well. According to the U.S. Census Bureau adults ages 18 to 34 earn $2,000 less today than they did in 1980 and are more likely to live in poverty. In 2017 the poverty rate for males (18.6%) and females (23.7%) ages 18 to 24 was about twice that of people aged 35 to 54.
What else can be done to improve the EITC? 1) Increase the participation rate. Currently the IRS estimates that 20% of eligible workers do not apply. (This year EITC Awareness Day occurred on January 25th. Did anyone notice?) 2) Cut the 21%-26% estimated overpayment rate through simplified filing instructions, improved cooperation with tax preparers and increased enforcement. 3) Establish a value for unpaid caregiving that would credit people living in and near poverty, mostly women, who work as unpaid caregivers for adults with chronic, disabling or serious health conditions. (A 2015 AARP Public Policy Institute Study estimated the economic value of such unpaid care at $470 billion.)
Right now the EITC primarily helps one type of household, those with dependent children under age 19. Extending comparable benefits to childless adults who work or who are full-time caregivers could go a long way to reducing poverty, increasing employment rates and addressing inequality through a program that has consistently had bipartisan support.
Brookings, Center on Budget and Policy Priorities, Health Affairs, Heritage Foundation, IRS, Journal of Labor Economics, National Bureau of Economic Research, Statista, Tax Foundation, Tax Policy Center