Blog: Extend and Expand the Earned Income Tax Credit (EITC) and the Child Tax Credit
Mar 09, 2015
Catholic Social Teaching is clear that all people have the right to live in human dignity, which for many is not possible without tax incentives since payroll taxes are taking a larger and larger bite out of their meager wages.
Next to Social Security, the EITC and the Child Tax Credit lift more people out of poverty than any other federal program. However, both programs will expire in 2017 if they are not extended. We believe that expanding the EITC and the Child Tax Credit for low-income workers themselves as well as for their families is a matter of basic tax fairness.
Economists across the political spectrum agree that the EITC has been one of the most effective anti-poverty programs we have. Together with the refundable Child Tax Credit, it helps keep about 10 million Americans, including more than 5 million children, out of poverty. There is also a consensus that making these programs permanent as well as expanding the EITC would strengthen opportunity for workers who are struggling to get by and help families become more economically secure. These tax credits have the power to raise living standards and lift millions of working Americans out of poverty.
Working Families Tax Relief Act
While we wait for a Republican proposal, we want to call attention to the “Working Families Tax Relief Act,” which has been introduced by Democrats. Senator Sherrod Brown (D-OH), the ranking Democrat on the Banking Committee, cosponsored this proposal with Senator Dick Durbin (D-IL). The measure would expand the EITC and Child Tax Credit to make permanent the expansion of credits that took effect in 2009, would expand the EITC for “childless workers” (more on this below), would extend both programs indefinitely, would index the Child Tax Credit to inflation and make it easier for qualified Americans to claim the EITC.
Senator Brown said, “The Earned Income Tax Credit and the Child Tax Credit lift families out of poverty, provide an incentive to work, and put real money back in the pockets of working Americans. That’s why expanding and strengthening these tax credits is so important. To reform our tax code, we must start in the homes of working Americans — not in corporate boardrooms.”
Reps. Richard Neal (D-MA) and Rosa DeLauro (D-CT) are co-sponsoring the House version of the bill.
The other proposals led by the Senate leadership include “The 21st Century Worker Tax Cut Act,” which introduces a new tax credit worth up to $1000 for families in which both parents work; “Helping Working Families Afford Child Care Act,” which would increase the size of the typical credit for child and dependent care from the current $600 to $2800 (but could rise as high as $8000) for most middle-income families; the “American Opportunity Tax Credit,” which gives families up to $3000 credit for college tuition and includes families earning up to $200,000.
What would happen in 2018 if the EITC and Child Tax Credit provisions expire in 2017? It would have a dire effect on the economy as a whole and on working families in particular. A study released last month by the Center on Budget and Policy Priorities (CBPP) found that more than 16 million people in low-income working families, including 8 million children, would fall into — or deeper into — poverty; and some 50 million Americans, including 25 million children, would face substantial cuts.
History and Effectiveness of the EITC and Child Tax Credit
The Economic Policy Institute (EPI) produced a major study of both the EITC and Child Tax Credit in September 2013, from which much of the following information is gleaned. Because of the nature of the study, the findings are still timely.
The EITC was first signed into law in the 1970s by President Ford and was considered an anti-poverty program and an alternative to welfare because it incentivized work. The program was expanded by President George W. Bush in 2008 and by President Obama in 2009 as part of the American Recovery and Reinvestment Act (ARRA). Under ARRA, benefits for families with more than two children were boosted and marriage penalties were reduced (some EITC for certain couples were no longer lost when they married).
Originally in the 1970s, the EITC was intended to offset the Social Security payroll taxes for low-income workers as well as rising food and energy prices, but no longer covers those costs.
Let’s be sure we understand how the EITC works. The EITC is work-oriented in that the amount of the tax credit is based on earnings from wages and salaries or self-employment income. The amount of the credit increases as earnings increase, but reaches a plateau, and then falls as earnings increase. For example, for a couple with two children, the credit rate is 40% of the first $13,090 in earnings, with a maximum credit of $5,236 if earnings reach $22,300. Over that amount the credit rate drops substantially until it reaches zero for taxpayers over $47,162.
Low-income workers with no children and noncustodial parents are also eligible for the EITC, but the maximum credit is just a small fraction of that for families with children and often too complicated for potential recipients to bother with.
The Child Tax Credit was enacted as part of the “Taxpayer Relief Act of 1997.” The origin of the credit can be traced to a recommendation for a $1000-per-child tax credit by the 1990 National Commission on Children, but was substantially less generous in the original law. It was eventually increased to $1000 per child as part of the 2001 and 2003 Bush tax cuts. The ARRA expansion of the Child Tax Credit substantially lowered the threshold for earnings to qualify for the tax credit.
The Child Tax Credit allows a nonrefundable credit against income taxes of $1000 per qualifying child under age 17. Unlike the EITC, the Child Tax Credit is not targeted to just lower-income taxpayers. A couple with two qualifying children can receive the tax credit with adjusted gross income levels of $150,000 (those levels are in the top 10% of the income distribution).
The EPI summarizes the major findings on the effectiveness of the EITC and Child Tax Credit as follows:
- Both the EITC and Child Tax Credit were initially proposed, supported and expanded by Republican lawmakers with broad bipartisan support
- Both the EITC and Child Tax Credit fail one of the criteria of evaluating tax provisions: simplicity and convenience. Claiming the tax credits can be complicated and involves filing many forms, which leads to errors of both over-and under- payment
- The EITC appears to increase the labor force participation of single mothers, yet the high marginal tax rates associated with its phase-out range do not appear to have a significant work disincentive effect
- The EITC is the most progressive tax expenditure in the income tax code
- The EITC reduces poverty significantly, with children constituting half of the individuals it lifts out of poverty
- The EITC and Child Tax Credit are effective in increasing after-tax income of its recipients and reducing income inequality.
A recent paper (February 20, 2015) by the Center on Budget and Policy Priorities focuses attention on low-income “childless workers” — adults without children and non-custodial parents — who receive little or nothing from the EITC. At the present time, this is the only group whose income and payroll taxes together either push them into poverty or deeper into poverty. CBPP estimates that there are over 7 million people in this category.
The Brown-Durbin bill would substantially strengthen the EITC for this group by lowering the eligibility age to 21, raising the maximum amount of credit offered and increasing the phase in/out rates.
Based on studies done by several economists and psychologists, the CBPP paper maintains that strengthening the EITC for “childless workers” would have a number of social as well as economic benefits, including the following:
- would increase labor force participation among low-skilled childless workers
- may increase their earnings, and thus their marriage rates and stability
- could help reduce crime and incarceration rates among the young
- would help their children (many are noncustodial parents) financially and would assist them in serving as role models for their children
A Matter of Fairness
Just as those in Congress who believe firmly that the EITC and the Child Tax Credit should be extended beyond 2017 and expanded in scope are beginning this journey now, we, at NETWORK strongly encourage all advocates to begin planning effective ways to support this effort. As is clear from examining a history of these two programs, extension has always garnered bipartisan support. And there is little controversy about the effectiveness of either the EITC or the Child Tax Credit.