The Center's work on 'Individuals and Families' Issues


Increase the EITC to Help Lift “Childless Workers” Out of Poverty

April 15, 2014 at 3:21 pm

It’s time for policymakers to fix a glaring hole in the Earned Income Tax Credit (EITC), as I explain today in an op-ed for National Journal:

While the tax credit reduces poverty among families with children by double-digit percentages, as a recent Congressional Research Service report found, it does little or nothing to help low-wage workers who aren’t raising minor children. A “childless adult” working full time at the minimum wage — an annual income of just $14,500 — earns too much to receive the credit.

As a partial result of the now-limited EITC, childless workers are the sole group of workers that the federal tax system pushes into — or in many cases, deeper into —poverty.

Indeed, as we detail in a new paper, about 7 million childless workers are taxed into or deeper into poverty by federal taxes (see chart).

Increasing the EITC for childless workers, as the President and many in Congress have proposed, can help address this problem.  Making more childless workers eligible for the EITC — including those working full time at the minimum wage — and boosting the credit for workers who are now eligible would significantly lessen the degree to which the tax code increases poverty among these workers.

And, as I explain in National Journal, expanding the EITC for childless workers will actually help many families:

Many so-called “childless workers” are non-custodial parents who have financial and parenting obligations. The President’s proposal to expand the EITC would benefit about 1.5 million non-custodial parents. Their children do better when these parents are working and are a positive force in their lives.

Additionally, many childless workers are future parents. Extending the EITC’s pro-work benefits to them would boost their incomes today while improving their future ability to provide for their children. And a child’s success also depends on his or her extended family and community. A stronger EITC for “childless” adults can support children’s siblings, uncles, aunts, and grandparents, who may be considered “childless” for tax purposes even if they live in the same home as their younger relatives. By helping to increase work, and possibly improve marriage rates and reduce crime, a stronger EITC can also help strengthen the communities in which children live.

Click here to read the National Journal op-ed and here to read our full paper on the EITC for childless workers.

The Top 10 (Well, 11) Federal Tax Charts

April 15, 2014 at 11:05 am

To usher in Tax Day, here are our top 11 charts on federal taxes, which provide context for debates on issues like tax reform and deficit reduction.

Our first chart shows the sources of federal tax revenue.

Individual income tax revenues have held steady for many decades at a little under half of federal revenue.  The share of federal revenue from payroll taxes (mostly Social Security and Medicare taxes) grew sharply between the 1950s and 1980s and has since remained relatively stable.  Conversely, the share of federal revenue from corporate taxes fell sharply between the 1950s and 1980s and has remained at this lower level.

Our second graph reminds us what those taxes pay for.

Social Security, major health programs like Medicare and Medicaid, and national defense account for roughly two-thirds of federal spending.  Safety net programs (such as unemployment insurance and nutrition programs) and interest on the debt account for 12 percent and 6 percent of federal spending, respectively.  The remaining 18 percent goes to such other areas as roads, education, and health and science research.

The United States is a relatively low-tax country, as the chart below shows.  When measured as a share of the economy, total government receipts (a broad measure of revenue) are lower in the United States than in any other member of the Organisation for Economic Co-operation and Development (OECD), even after accounting for the modest revenue increases in the 2012 “fiscal cliff” deal and the taxes that fund health reform.

While high-income filers pay a large share of the nation’s taxes, the main reason is that they receive a large share of the nation’s income.  Moreover, focusing solely on the income tax — among the most progressive taxes — gives a distorted picture of the full set of taxes that different income groups pay.

The chart below provides a more complete picture.  It shows the share of all federal, state, and local taxes that each income group pays and what share of the nation’s income it collects.  As the graph shows, incomes in the United States are extremely polarized, and the overall tax system is only modestly progressive.  For example, the top 1 percent of earners received 22 percent of the nation’s income in 2013 and paid 24 percent of all taxes; the bottom 60 percent of people received 21 percent of the income and paid 17 percent of the taxes.

This largely reflects the fact that average tax rates increase modestly as you move up the income scale.  On average, the bottom 20 percent pays 19 percent of their income in taxes; the middle 20 percent pays 27 percent, and the top 20 percent pays 32 percent, according to Citizens for Tax Justice.

Policymakers considering tax policy changes should keep the economic context in mind, including the dramatic increase in inequality in recent decades.  Congressional Budget Office data show that incomes grew at much faster rates for high-income people than for everyone else between 1979 and 2010 (the most recent year available).

As the chart below shows, the average middle-income family had $9,500 less after-tax income in 2010, and the average household in the top 1 percent had $481,800 more, than if all groups’ incomes had grown at the same rate since 1979.

Many low-wage workers struggle to climb the economic ladder, particularly workers who are not raising minor children — the sole group that the federal tax code taxes into (and deeper into) poverty, as the chart below shows.  Often called “childless workers” — though many are non-custodial parents who have financial obligations to their children and play an important role in their lives — they pay substantial payroll taxes and begin paying income taxes while earning less than the poverty line (about $12,000 for a single worker).  The Earned Income Tax Credit (EITC) for these workers is far too small to offset their income and payroll tax liabilities.

The average childless worker who receives the EITC gets just $264, a small fraction of the EITC that other low-wage workers receive, as the chart below shows.  Moreover, childless workers under age 25 are ineligible for the EITC.

There are recent signs of bipartisan momentum to provide a meaningful EITC for childless workers.  President Obama as well as key House and Senate members have advanced proposals that would take a major step forward.  As the chart below shows, the EITC for a childless worker making poverty-level wages would rise from $171 to $841 under the President’s plan.  Moreover, the Treasury Department estimates that the President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for about another 10 million, under a poverty measure that includes the cash value of tax credits and benefit programs.  The congressional proposals are larger, and so would likely have larger anti-poverty effects.

Recent deficit-reduction measures, including the 2011 Budget Control Act’s funding caps and automatic cuts under sequestration, have been heavily tilted to spending cuts, rather than revenue increases.

If sequestration remains in place, 77 percent of the deficit reduction over 2015-2024 resulting from policy changes will come from spending cuts.  Just 23 percent will come from increased revenues, as the chart below shows. 

Policymakers agreed on a bipartisan basis last December to offset the cost of partially lifting sequestration for 2014 and 2015.

By contrast, however, the Senate Finance Committee has approved a package of “tax extenders” (expiring tax breaks, mostly for corporations) without offsetting the cost.  If continued for the next decade without offsets, the extenders would cost $484 billion.  That’s the equivalent of giving back more than half of the revenue savings from the 2012 “fiscal cliff” deal, which raised tax rates on very high-income taxpayers, as the chart below shows.  And if policymakers also continue the “bonus depreciation” tax for businesses — mistakenly in our view — the ten-year cost rises to $747 billion, wiping out nearly all of the fiscal-cliff savings.

Policymakers can reduce the deficit or finance investments by scaling back costly and inefficient “tax expenditures,” or spending delivered through the tax code in the form of tax credits, deductions and exclusions.

For example, House Ways and Means Chairman Dave Camp’s recent tax reform plan outlined dozens of specific cuts in tax subsidies.

As the chart below shows, tax expenditures cost well more than Social Security and also than Medicare and Medicaid combined.  Harvard economist Martin Feldstein, former chair of President Reagan’s Council of Economic Advisers, has said that “cutting tax expenditures is really the best way to reduce government spending.”

Just the Basics: Tax Expenditures

April 10, 2014 at 3:00 pm

Tax expenditures — subsidies delivered through the tax code as deductions, exclusions, and other tax preferences — have been in the news as many policymakers have proposed cutting them to reduce the deficit, finance investments, reduce tax rates, or a combination of those goals.  As Tax Day approaches, we’ve updated several backgrounders that explain how the federal government and states collect and spend tax dollars.  Today, we review our revised tax expenditures backgrounder.

Tax expenditures reduce the amount of tax that households or corporations owe.  To benefit from a tax expenditure, a taxpayer must undertake certain actions or meet certain criteria.  For example, some households with a mortgage can reduce their taxes by claiming a tax deduction for their mortgage interest, and corporations can receive a tax subsidy for investing in machinery.

In fiscal year 2013, tax expenditures reduced federal income tax revenue by over $1.1 trillion, and they reduced payroll taxes and other revenues by an additional $120 billion.  For comparison, just the federal income tax expenditures together cost more than Social Security, or the combined cost of Medicare and Medicaid, or defense or non-defense discretionary spending (see chart).

Click here to read the full paper.  For more on how deductions and credits work, see our related Policy Basics:  Tax Exemptions, Deductions, and Credits.

New York Times Calls Senate Finance Committee “Extenders” Vote Fiscally “Imprudent”

April 9, 2014 at 4:37 pm

The Senate Finance Committee has voted to reinstate dozens of temporary tax breaks that expired at the end of 2013 — without offsetting their cost.  A recent must-read New York Times editorial called the vote “imprudent.”  Indeed, we find it fiscally unsound.

The Senate Finance Committee bill would cost more than $85 billion to extend the so-called “tax extenders,” which are mostly corporate tax breaks that Congress has routinely extended year after year.  But that misrepresents the true cost of these tax breaks, because the bill would extend them for only two years.

Indeed, if Congress repeatedly renewed the extenders without offsets, they would cost $484 billion over the next decade.  That’s the equivalent of “giving back” more than half of the revenue from the “fiscal cliff” budget deal of late 2012, when policymakers raised tax rates on very high-income taxpayers (see chart).

This total excludes the costs of continuing of bonus depreciation, a provision that allows businesses to take bigger upfront tax deductions for certain new investments, on the assumption that Congress would let this stimulus measure expire, as it has in the past, once the economy strengthens.  That would be the right step, as we’ve explained.

If instead, Congress continued this provision, the ten-year cost of making the tax extenders permanent would rise to $747 billion — eroding nearly all of the fiscal cliff revenue savings.  (The Finance Committee bill includes a two-year extension of bonus depreciation.)

Policymakers’ current approach to extenders is not only fiscally unsound, but the New York Times highlights that it also represents a fiscal double standard:

For the past few years, Democrats have gone along with the Republicans’ refusal to incur debt for programs that are far more effective than tax cuts at boosting the economy and far more urgent — like jobless benefits and spending on education and infrastructure. Instead of borrowing to pay for such needs, lawmakers have coupled most new outlays with spending cuts elsewhere in the budget. . . . In contrast, borrowing to finance the tax cuts basically transfers money to corporate owners and executives, with no reduction demanded in other forms of government aid to business and with future taxpayers left to pay the bill.

Congress has better choices:  for example, House Ways and Means Committee Chairman Dave Camp’s tax plan includes provisions that limit or eliminate dozens of special interest revenue raisers, providing a roadmap on how to pay for any extenders that policymakers think are worth continuing.

“Tax Freedom Day” Analysis Can Give a Misleading Impression of Tax Burdens

April 7, 2014 at 5:01 pm

We explain the problems inherent in the Tax Foundation’s annual “Tax Freedom Day” analysis in a new paper.  Here’s the opening:

The Tax Foundation released its annual “Tax Freedom Day” report today that, once again, can leave a strikingly misleading impression of tax burdens — showing an average federal tax rate across the United States that’s likely higher than the tax rate that 80 percent of U.S. households actually pay (see chart).

To project the day when “the nation as a whole has earned enough money to pay its total tax bill for [the] year,” the Tax Foundation calculates the average tax rate by measuring tax revenues as a share of the economy (similar to estimates of total revenues as a share of Gross Domestic Product, or GDP).

In a progressive tax system like that of the United States, only upper-income households on average pay federal tax at rates that are equal to or above federal revenues as a share of the economy.  Estimates from the nonpartisan Urban-Brookings Tax Policy Center show that low- and middle-income households (about 80 percent of all households) will pay a smaller share of their income in federal taxes this year than the Tax Foundation’s average tax rate.

The Tax Foundation acknowledges this issue in a methodology paper accompanying its report, noting that its estimates reflect the “average tax burden for the economy as a whole, rather than for specific subgroups of taxpayers.”  Consequently, those who report on Tax Freedom Day as if it represents the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay.

Click here to read the full report.