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America's Working Poor and how the Earned Income Tax Credit (EITC) can Help

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Executive Summary

The Earned Income Tax Credit (EITC) is a refundable tax credit that is of greatest benefit to America’s working poor. It appeals to Republicans because it is pro-work and pro-family and to Democrats because it is an effective safety net that has pulled millions out of poverty. Because of this, the EITC has maintained popularity and has expanded since its creation. There are debates on how to reduce improper payments, and how it should be funded as well as who it is potentially hurting. With a Republican White House and Congress in 2017, it is unlikely that the EITC’s 2009 boost will be renewed although the President-elect proposes an expansion through childcare spending rebates. The expansion will most likely be funded through cutting ineffective welfare programs and attempts to reduce fraud through restrictions on other tax credits. It is unclear whether or not a proposal to expand benefits for childless workers will then be cost-effective and popular enough to pass.

Origins and Development

The Earned Income Tax Credit (EITC) began as a way to address the problems of America’s working poor while attempting to exemplify the typical American value that if you work hard and play by the rules, you can, and should, get ahead. Continuing President Lyndon B. Johnson’s War on Poverty while realizing “the shift from thinking of welfare as a nonenforceable privilege over to thinking of it as a legal right to stated benefits in response to objectively determined needs,” former Republican President Richard Nixon believed in the idea that the government had a role in promoting the economic security of its citizens and proposed the Family Assistance Plan in 1969 (Lampman 1969;1).

Nixon’s belief in activist government by expanding the welfare state was a political strategy “to move poor southern whites from New Deal liberalism to Republican conservatism” (Noble 1997; 118). By attempting to expand the safety net for the poor while opposing school integration and never publically supporting the Civil Rights Act, Nixon’s ‘southern strategy’ not only started a new political party alignment among poor southern whites but a new welfare movement. However, Nixon’s Family Assistance Plan included a guaranteed annual income for the working poor as well as for the nonworking, so it did not pass through Congress in 1970 or 1972 because, under American values, the nonworking are never ‘deserving’ (Alberti & Brown 2013).

In the late 1960s and early 1970s, Democratic Senator Russell Long deemed the President Nixon’s program anti-work, instead championing a pro-work policy that offered relief to low wage workers by refunding social security payroll taxes (Halpern-Meekin et al 2015). By 1975, Senator Long’s plan had eligible taxpayers able to claim a refundable tax credit equal to 10% of their earned income, up to $4,000 ($17,972 in 2016 dollars), then the amount eligible to claim would begin to decrease (“40 Years Ago” 2014; “CPI Inflation Calculator” 2016).

The program appealed to Presidents Gerald Ford and Ronald Reagan who expanded the program, and was significantly expanded under President Bill Clinton who ran his campaign on ending “welfare as we know it” (Noah 2014). The Clinton administration eliminated long-term cash assistance and implemented work requirements, abolishing a class of non-working and government-dependent poor. The American welfare state, unlike Nordic countries’ universal-inclusion, has always been market-based, beginning with social security and pensions. Therefore, the Clinton administration’s decision to make safety-net programs like Temporary Aid to Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP) contingent on market contribution then expand the EITC, which is heavily dependent on market contribution, uphold the American tradition of what welfare should be; it should be for those who ‘deserve’ it because they contribute to the labor market (Esping-Anderson & Myles 2009; 646).

Even in a Republican-controlled Congress, President Clinton used the EITC to substantially boost incomes, rather than just ease the tax obligations of the poor. The maximum annual EITC a family with two children could claim increased from $953 in 1990 to $3,556 by 1996 and was adjusted for inflation (Halpern-Meekin et al 2015). The EITC was further expanded under Presidents George W. Bush and Barack Obama (Noah 2014).

Program Mechanics

The EITC is a government tax expenditure, which is spending through the tax code that benefits specific groups of people (in this case, the working poor). Specifically, it is a federal tax credit. A federal tax credit is dispersed from tax revenue collected by the Internal Revenue Service (IRS). Credits reduce the amount one would owe dollar for dollar. The EITC is a refundable credit, allowing taxpayers to claim credits that exceed the amount they owe, thereby receiving a net refund from the IRS. Because it is refundable, one does not need to owe any taxes to receive the benefit. Also, because it is a refund, it does not count as income so it is not considered during evaluation for means-tested programs like TANF or SNAP meaning this program will not necessarily be helpful in getting families off welfare programs if they are already on them. The EITC is the largest refundable tax credit and the largest, and most effective, anti-poverty program aimed at working-age households, pulling approximately 9.8 million people out of poverty in 2014. (“About EITC” 2016; “What is the earned” n.d.)

Below is a graph of government spending on the EITC (as well as cash-assistance welfare and the Child Tax Credit) since its creation from 1975 to 2011.

The growth of the EITC is shown in this graph as well as its large expansion under the Clinton administration for reasons explained in Origins and Development. The IRS approximates the EITC cost the government $66.7 billion in 2014 and is estimated to cost about $69 billion in 2015 (“About EITC” 2016; Edwards & de Rugy 2015).

The EITC requires no special means test like TANF or SNAP. To receive the benefit, all that is required of those who are eligible are the same documents that every American submits at tax time: A W-2 and the Social Security numbers (SSN) of household members. This also means it requires no separate office, bureaucracy or trained professionals by the government or the state. Individuals can fill out their own taxes for free, or go through a private agency like H&R Block for a fee, and the IRS already cuts refund checks. Therefore, after the eligible individual files their taxes, they will get their refund check in the mail, or directly deposited into their bank account.

There are two categories for EITC recipients: childless adults and families with children. The EITC rewards those who work the more they work, to a point, then levels off before decreasing. Income includes wages, tips and other compensation included in gross earnings after self-employment taxes (Falk 2014). Below is a graph of the structure of the EITC benefit for those filing as single or head of household status.

Childless adults receive the least amount of benefits while those with three children receive the most. Those who are married and file jointly see their credit phase out at an income of $5,520 higher than shown. By giving the largest benefits to families and to those who work more (to a point), this program incentivizes both work and family which is largely why it is so popular. In fact, research has shown that the EITC encourages work in single people and primary earners in married couples (Eissa & Hoynes 2004).

To receive benefits, the taxpayer must be within the ages of 25 and 64 and cannot be claimed as a dependent on another person’s tax return and live in the United States. Though the taxpayer does not have to be a U.S. citizen, they must have a valid SSN. Their spouse (if married) and all qualifying children must also have valid SSNs (Falk 2014).

The child must be the biological, adopted, foster child of the taxpayer or a (half/step) brother or sister or descendant of such a relative to be considered a qualifying child. The qualifying child must live with the taxpayer at least 50% of the time and in the United States. The qualifying child must be under 19 years of age (or 24 if a full-time student) or permanently and totally disabled (Falk 2014).

If more than one tax filer can claim the child for the EITC they can either settle it on their own or apply a tie breaker rule: the parent of the child claims the child. If neither is the parent, then the parent with the highest adjusted gross income (AGI) claims the child. If both are parents, whichever parent the child resides with the longest claims the child. If the child resides with parents for the same amount of time, whichever parent with the highest AGI claims the child (Falk 2014).

Issues and Debates

Because of the complexity in the very nature of a tax credit, especially in who claims the child and the way it fluctuates with earnings, the Office of the Inspector General of the U.S. Department of Treasury declared the EITC as the only IRS program that is considered high-risk for improper payments. In 2014, according to the inspector general, 22 to 26 percent of all payments were improper. (“Existing Compliance Processes” 2014). The IRS states incorrectly claiming children was the major source of improper payments in 2014 though it receives no data that can verify a child’s primary source of residence. Attempts to use data from other programs has been proven unsuccessful (Pergamit et al 2014).

While Marr et al. (2016) found that the EITC has done more to increase work among single mothers than Clinton’s 1996 welfare reform, it is also the main reason that childless adults are taxed into poverty. The study found that a childless adult working full time at the minimum wage ($14,500) will acquire an income tax and payroll tax liability of $1,497 in 2016 after receiving an EITC of just $27. While the EITC is effective in cutting the poverty rates for single and married parents of two by 16.65 percent and 28.86 percent respectively, it cuts the rates of rates for childless single and married households by 0.14 and 1.39 percent respectively (Matthews 2015). For this reason, and the belief that if you work, you should not be poor, Democrats and Republicans alike have proposed plans to expand the EITC to improve benefits for childless workers. President Barack Obama, Senator Patty Murray and House Speaker Paul Ryan have proposed near identical plans in doing just that (Matthews 2015).

Paul Ryan, as Speaker of the House, will arguably be the second-most powerful elected official of the United States in 2017 and his relationship with President-elect Donald Trump will help shape national policy. The President-elect has appointed a longtime Ryan ally, Reince Priebus, as the chief of staff while Steve Bannon, who has vowed to destroy Ryan, is Trump’s pick for chief strategist (Ponnuru 2016). Relationships within the White House are not the only thing that could affect an EITC expansion; 2017 will bring a Republican White House and Congress and New York magazine writer John Chait once noted, “The ultimate trouble is that the EITC costs money. And when you get into the gritty reality, Republicans are not willing to devote resources to it”.

The year 2017 will be a critical year. President Obama’s 2009 stimulus package boosted the EITC for married couples and families with three or more children. However, the package expires in 2017 and it is unclear whether or not Republicans are going to let it expire (Matthews 2015). The EITC has political armor; it’s pro-work, pro-family, and helps the poor who are contributing to society. If it expires, the Center on Budget and Policy Priorities estimates 16 million Americans would be pushed into, or deeper into, poverty (2014). On the other hand, if the EITC expands, especially because the President-elect’s proposed largest tax breaks are going to the rich, it may be at the expense of those who it is trying to help. The Unites States has never “privileged tax cuts for businesses and the affluent” (Noble 1997; 79). For example, Paul Ryan planned to cut programs like the Social Service Block Grant and the Farmers’ Market Nutrition Program or requiring SSNs for those claiming the Child Tax Credit to reduce fraud in order to fund his expansion for childless workers (Matthews 2015). However, though it will reduce fraud, requiring Social Security numbers will make immigrants ineligible to claim the Child Tax Credit. Historically, when Republicans have proposed deep cuts to Medicare, Medicaid and the EITC through the FY 1995 recessions bill, the Balanced Budget Amendment, and the FY 1996 bill, it has been met with Democratic backlash, so these cuts and requirements will most likely be met with the same response. (Noble 1997; 125).

Though it is unclear what will happen to the expiration of the 2009 stimulus package, below is an excerpt from the official Donald J. Trump website explaining his plan for the EITC:

The Trump Plan would offer spending rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65 percent of remaining eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer (based on the lower-earning parent in a two-earner household).

This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less. (“Donald J. Trump for President” 2016)

This is, in essence, an expansion to the EITC, potentially to offset the President-elect’s proposed elimination of head of household filing status. This expansion, as well as an opportunity to increase benefits for childless workers, and the opportunity to renew the 2009 boost will all be on the disproportionately Republican table in 2017. Center for Tax Policy Senior Fellow James R. Nunns (2016) proposes President-elect Trump’s tax policy will decrease federal revenue by $6.2 trillion over the first decade before accounting for added interest costs. Although expansions to the EITC have generally and historically been favorable across party lines, it is very unlikely that every proposed expansion will be signed by the President-elect and will pass through Congress, mainly due to cost.

The response from the Democratic minority will most likely begin with keeping the head of household filing status, though most Republicans will likely agree on that as well. Democrats would also be in favor of keeping President Obama’s 2009 expansion to the EITC and, headed by Senator Patty Murray, favor the increase in benefits for childless workers. Though they are the minority, it will be very helpful that House Speaker Paul Ryan will also be in favor of that increase in benefits. However, the Democratic Party would propose this be funded by tamping down on tax benefits for corporations and high-income individuals by closing loopholes (Matthews 2015). But, because the influence the rich have on electoral and legislative processes (specifically through campaign contributions), the strong anti-immigration campaign that the President-elect ran, and the President-elect’s plan to increase tax breaks for the rich, it is very unlikely that if the EITC is expanded, it will be funded through taxing the rich (Bonica et al 2013).

Under a new administration, the EITC should see a new expansion as it historically has. It would be very hard to justify cutting a program is pro-family, incentivizes work and has pulled millions out of poverty. The question then becomes what kind of expansion it will see in 2017. Whichever expansion passes, it is highly unlikely it will be funded by the tax revenue of the rich.

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