The Center's work on 'Earned Income Tax Credit' Issues


Reagan’s Actions Made Him a True EITC Champion

August 1, 2014 at 11:03 am

We’ve noted that the Earned Income Tax Credit (EITC), which reduces poverty while encouraging and rewarding work, has enjoyed broad support over the years.  One of its champions was President Reagan, who proposed and then signed a major expansion of it in the 1986 Tax Reform Act.

While Reagan is often quoted as calling the EITC “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” he was, as Tax Policy Center director Len Burman blogged this week, actually referring to the 1986 tax reform as a whole, not just its EITC component.  But that takes nothing away from Reagan’s role in strengthening the EITC.

Burman correctly notes that “Republican icon Ronald Reagan supported the Tax Reform Act of 1986’s expansion of the EITC.”   Indeed, Reagan did more than support the EITC increase; he proposed it.

The tax proposals that President Reagan submitted to Congress in 1985 included a proposal to phase in the credit more quickly as a worker’s income rises, expand the maximum EITC, phase the credit out more slowly so that more families would be eligible, and index these parameters for inflation.  The final legislation included the Reagan-proposed phase-in (14 percent) and phase-out (10 percent) rates, as well as his proposed indexation.  Congress went even further on its increase in the maximum credit.

There’s no question that Ronald Reagan’s actions secured his place as a strong advocate of the EITC.

IMF and OECD Call for Stronger EITC and Minimum Wage

July 30, 2014 at 11:42 am

The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), which have previously recommended expanding the Earned Income Tax Credit (EITC) and raising the federal minimum wage, both issued recent reports underscoring that these measures should be viewed as complements, not competing alternatives.

The reminder that a higher minimum wage can make a stronger EITC more effective at reducing poverty and encouraging work is especially timely given House Budget Committee Chairman Paul Ryan’s new poverty plan.  Ryan commendably recommended expanding the EITC for childless workers and non-custodial parents, but presented this as an alternative to a minimum wage increase.

The IMF report recommends:

An expansion of the EITC (including making permanent the various extensions that are due to expire in 2017) would also raise living standards for the very poor.  Finally, given its current low level, the minimum wage should be increased.  This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households.

The OECD working paper reiterates the OECD’s previous finding that “the EITC is a large and successful antipoverty program” and recommends strengthening the EITC for childless workers and non-custodial adults, along with raising the minimum wage.  Because the EITC is a proven work incentive, it expands the number of people seeking jobs in the low-wage sector, which can put some downward pressure on the wages that employers offer potential workers — meaning that some EITC dollars would effectively flow to employers, not workers.  A higher minimum wage helps offset that effect.  As the OECD explains:

Setting the federal minimum wage at a reasonable level can also help to make the EITC more effective at raising incomes. Although hard to quantify, employers could be capturing part of the credit by paying lower wages than they would in the absence of the EITC (OECD, 2009). Increasing the federal minimum wage would counteract this dead-weight loss by supporting wage levels.

For policymakers of either party striving to expand opportunity and raise the living standards of working-poor families, the policy roadmap is clear:  extend the recent improvements in the EITC and Child Tax Credit, expand the EITC for childless workers, and raise the minimum wage.

What Difference Would Ryan’s EITC Expansion Make for Childless Workers?

July 29, 2014 at 4:07 pm

We’ve explained that House Budget Committee Chairman Paul Ryan’s proposed expansion of the Earned Income Tax Credit (EITC) for childless adults, including non-custodial parents, would encourage work and reduce poverty.  This interactive chart allows you to compare the EITC that childless workers at different income levels would earn under current law and under the Ryan expansion, which mirrors a proposal from President Obama.

For example, the EITC for single childless worker making poverty-level wages (we estimate $12,566 in 2015) would jump from about $170 under current law to about $840 in 2015 under the Ryan and Obama proposals.

The Ryan and Obama plans would, starting in 2015: lower the EITC’s eligibility age for workers not raising minor children from 25 to 21, double the maximum credit to about $1,000, and phase in the credit more quickly as a worker’s income rises.  (Unlike Chairman Ryan, President Obama would also allow workers aged 65 and 66 to claim the credit.)

The big difference between the Ryan and Obama plans, as we’ve noted, is the proposed “offsets” to pay for them (not reflected in the interactive above).  Several of Ryan’s offsets would hit low-income and other vulnerable families, while the President would pay for his EITC expansion by closing tax loopholes for wealthy taxpayers.

Nevertheless, it’s encouraging that leading members of both parties recognize the need to do more for the lone group that the federal tax system taxes into poverty.

Ryan Roundup: What You Need to Know About Chairman Ryan’s Poverty Proposal

July 25, 2014 at 4:42 pm

We’ve compiled CBPP’s analyses and blog posts on House Budget Committee Chairman Paul Ryan’s new poverty proposal.  We’ll update this roundup as we issue additional analyses.

  • Blog Post: Why the Ryan Plan Should Worry Those Concerned About the Affordable Housing Crisis, Part 2
    August 5, 2014
    House Budget Committee Chairman Paul Ryan’s proposal to consolidate 11 safety net and related programs, including the four largest federal rental assistance programs, into a single block grant to states risks significant funding cuts to housing assistance that helps 4.7 million low-income families.  The combination of those cuts, and the possible elimination under Ryan’s plan of program rules that ensure housing stability and affordable rents, could undercut rental assistance programs’ effectiveness and put substantial numbers of vulnerable families at risk for homelessness.
  • Blog Post: Why the Ryan Plan Should Worry Those Who Are Concerned About the Affordable Housing Crisis, Part 1
    July 31, 2014
    A centerpiece of House Budget Committee Chairman Paul Ryan’s poverty plan is the proposal to consolidate 11 safety net programs — including four housing assistance programs — into a single, flexible block grant to states.  Among its downsides, this proposal threatens to lead to reductions in funding that provides housing assistance to millions of low-income families and individuals.
  • Blog Post: What Difference Would Ryan’s EITC Expansion Make for Childless Workers?
    July 29, 2014
    We’ve explained that House Budget Committee Chairman Paul Ryan’s proposed expansion of the Earned Income Tax Credit (EITC) for childless adults, including non-custodial parents, would encourage work and reduce poverty.  Our interactive chart allows you to compare the EITC that childless workers at different income levels would earn under current law and under the Ryan expansion, which mirrors a proposal from President Obama.
  • Blog Post: Ryan’s “Opportunity Grant” Would Likely Force Cuts in Food and Housing Assistance
    July 29, 2014
    House Budget Committee Chairman Paul Ryan maintains that consolidating 11 safety-net and related programs into a single “Opportunity Grant” would give states the flexibility to provide specialized services to low-income people.  But providing these additional services would require cutting assistance funded through the Opportunity Grant to other needy people.  And because SNAP (formerly food stamps) and housing assistance together make up more than 80 percent of the Opportunity Grant, the cuts would almost certainly reduce families’ access to these programs, which are effective at reducing poverty — particularly deep poverty.
  • Blog Post: History Suggests Ryan Block Grant Would Be Susceptible to Cuts
    July 28, 2014
    Ryan says that the block grant would maintain the same overall funding as the current programs.  But even if one thought that current-law funding levels were adequate, they likely wouldn’t be sustained over time under the Ryan proposal:  history shows that block grants that consolidate a number of programs or may be used for a wide array of purposes typically shrink — often very substantially — over time.
  • Blog Post:  Why Ryan’s Proposed Work Requirements Are Cause for Concern
    July 25, 2014
    House Budget Committee Chairman Paul Ryan’s new poverty plan predictably showcases the 1996 welfare law, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF), as a model for reforming other safety net programs.  For example, states would have to impose work requirements on all recipients of assistance funded through the “Opportunity Grant” — the block grant that would replace 11 safety net and related programs — who are not classified as unable to work.  We have four key concerns about this proposal.
  • Blog Post:  Dean: SNAP Is a Successful, Influential Component of the Safety Net
    July 25, 2014
    SNAP is not only one of the most efficient and effective safety net programs, but it’s also helping improve other programs, CBPP’s Stacy Dean told a House Agriculture subcommittee.
  • Commentary:  Ryan “Opportunity Grant” Proposal Would Likely Increase Poverty and Shrink Resources for Poverty Programs Over Time
    July 24, 2014
    A centerpiece of House Budget Committee Chairman Paul Ryan’s new poverty plan would consolidate 11 safety-net and related programs — from food stamps to housing vouchers, child care, and the Community Development Block Grant (CDBG) — into a single block grant to states.  This new “Opportunity Grant” would operate initially in an unspecified number of states.  While some other elements of the Ryan poverty plan deserve serious consideration, such as those relating to the Earned Income Tax Credit and criminal justice reform, his “Opportunity Grant” would likely increase poverty and hardship, and is therefore ill-advised, for several reasons.
  • Blog Post:  Ryan Adds Momentum to Expanding EITC for Childless Workers
    July 24, 2014
    House Budget Committee Chairman Paul Ryan highlighted the Earned Income Tax Credit as one of the most effective anti-poverty programs and joined growing bipartisan calls to expand it for childless adults (including non-custodial parents), the lone group that the federal tax system taxes into poverty.  We applaud this step, though we encourage him to reconsider some of his proposals to offset the cost — which would hit vulnerable families — and his opposition to a much-needed increase in the minimum wage.
  • Blog Post:  Ryan’s Rhetoric Doesn’t Match His Proposal’s Reality
    July 24, 2014
    House Budget Committee Chairman Paul Ryan left the impression that his proposed Opportunity Grant will allow low-income individuals to get income assistance as well as help they may need to go to school, get off drugs, and succeed in the workplace.  That picture, however, doesn’t reflect the reality of his proposal.

We also issued several pieces ahead of Chairman Ryan’s announcement of his proposal:

  • Analysis:  Deep Poverty Among Children Worsened in Welfare Law’s First Decade
    July 23, 2014
    Since the mid-1990s, when policymakers made major changes in the public assistance system, the proportion of children living in poverty has declined, but the harshest extremes of child poverty have increased.  After correcting for the well-known underreporting of safety net benefits in the Census data, we estimate that the share of children in deep poverty — with family income below half of the poverty line — rose from 2.1 percent to 3.0 percent between 1995 and 2005.  The number of children in deep poverty climbed from 1.5 million to 2.2 million.Blog Post:  Fewer Poor Children Under Welfare Law, But More Very Poor Children
  • Blog Post: CLASP: State Experiences Show Safety Net Programs Don’t Need Massive Overhaul to Work Better
    July 23, 2014
    Olivia Golden of the Center for Law and Social Policy (CLASP) took a closer look at the experiences of six states to debunk common myths about the delivery of safety net programs. . . . Golden explained that the experiences of the six states involved in the Work Support Strategies (WSS) initiative — a project coordinated by CBPP, CLASP, and the Urban Institute that is designing, testing, and implementing more effective, streamlined, and integrated approaches to delivering key supports for low-income working families — offer lessons for how to improve safety net programs.
  • Blog Post:  Why the 1996 Welfare Law Is Not a Model for Other Safety Net Programs
    July 22, 2014
    House Budget Committee Chairman Paul Ryan’s upcoming poverty plan will likely showcase the 1996 welfare law, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF) — a block grant with fixed federal funding but broad state flexibility — as a model for reforming other safety net programs.  A careful examination of the record, however, indicates that the 1996 law’s results were mixed and that if the goal is to reduce poverty, especially among the most disadvantaged families and children, there are serious downsides to embracing the 1996 law as a model.
  • Commentary:  Policymakers Often Overstate Marginal Tax Rates — and Understate Trade-Offs In Reducing Them
    July 22, 2014
    Some Washington policymakers are increasingly focused on whether government benefits for low- and moderate-income people create disincentives to work — in particular, when these benefits phase down as the earnings of beneficiaries rise.That phase-down rate is often called the “marginal tax rate” because it resembles a tax — benefits fall as earnings rise.  The relationship between marginal tax rates and disincentives to work is an important issue, one worthy of serious debate.  Some policymakers, however, often overstate the size of marginal tax rates and their impacts on work, and understate the trade-offs in trying to lower these rates.Blog Post:  Understanding Marginal Tax Rates and Government Benefits

House GOP Follows Ryan Anti-Poverty Plan With Pro-Poverty Legislation

July 25, 2014 at 11:12 am

House Budget Committee Chairman Paul Ryan (R-WI) extolled the anti-poverty effects of the Earned Income Tax Credit (EITC) and, in his new poverty proposal, wisely proposed expanding it for childless adults (including non-custodial parents).  The praise that Chairman Ryan correctly gave the EITC also applies to the refundable portion of the Child Tax Credit (CTC).  Both of these essential tax credits encourage work, expand opportunity, and reduce poverty.

Today, however, House Republicans are considering on the House floor permanent CTC legislation — a bill for which Rep. Ryan voted as a Ways and Means Committee member — that would lead to more poverty, not less.  The bill permanently alters the CTC by extending it higher up the income scale so that more families with six-figure incomes can benefit from it, while failing to make permanent a key CTC improvement from 2009 for working-poor and near-poor families that’s slated to expire at the end of 2017.  Census data show that letting the CTC improvement for low-income working families expire after 2017 would push 12 million people — including 6 million children — into or deeper into poverty (see chart).

As we have explained, the House bill raises the income levels at which the CTC begins to phase out and indexes those thresholds to inflation.  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $160,000, for example, would receive a new tax cut of $2,200 in 2018.  But because the bill fails to make permanent the 2009 reduction in the CTC’s earnings threshold after 2017, a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose her entire CTC of $1,725 in 2018.

The bill also indexes the current maximum credit of $1,000 per child to inflation, but that would not help most working families with low or moderate incomes because it benefits only those with incomes high enough to receive the maximum credit.  If the credit’s $3,000 earnings threshold (the level of family earnings at which the credit starts to phase in) is allowed to expire at the end of 2017, the threshold will nearly quintuple — and families making less than about $14,500 will lose their CTC altogether.  In addition, many working families with incomes somewhat above $14,500 will have their CTC cut substantially and no longer receive the maximum credit, making the inflation adjustment meaningless for them.  Under the House bill, indexing would not benefit a family with two children in 2018 until the family has earnings of at least $28,050 — nearly double full-time work at the minimum wage.

Chairman Ryan’s colleagues should consider the poverty-fighting effects of tax credits such as the CTC for low-income working families.  Then they should reverse course and put these families’ needs first, rather than last.