Building a Better EITC
July 8, 2014Print
This post was written by Isabel Sawhill, co-director and Quentin Karpilow, senior research assistant at the Center on Children and Families at the Brookings Institution. It first appeared as exclusive commentary for the Spotlight on Poverty and Opportunity blog. We are cross-posting with their permission.
The Earned Income Tax Credit (EITC) is one of the federal government’s most effective antipoverty policies. In 2012 alone, it lifted about 6.5 million people out of poverty, including roughly 3.3 million children. Designed to incentivize work, the program has been hugely successful in boosting employment rates among poor single mothers. And these accomplishments have led to broad bipartisan support from figures such as Paul Ryan, Greg Mankiw, and Patty Murray.
However, the EITC still falls short of its potential, in large part because it offers little to no support to many of the workers who need it most. As such, it’s encouraging that President Obama chose to make expanding the EITC a priority in his fiscal year 2015 budget. Still, we think there’s opportunity for more robust reforms that further broaden the reach of this important program—at no additional cost to taxpayers.
The president’s plan takes some modest (but important) steps toward strengthening this make-work-pay policy. First, it would increase benefits to workers without children—a subgroup that has historically received very little help from the program. More specifically, the White House would double their maximum credit from about $500 to about $1,000, raise the income level at which their benefits are fully phased out from about $15,000 a year to about $18,000 a year, and loosen the age eligibility restrictions so as to include childless young adults between the ages of 21 and 25. The president also proposes making permanent the benefit expansions for married couples and families with three or more children that were temporarily enacted through the Recovery Act.
These are modest steps in the right direction. According to U.S. Treasury Department estimates, the proposed expansion for childless workers would lift about 500,000 people out of poverty and boost the earnings of more than 13 million low-income workers.
We believe, however, that a bolder set of EITC reforms is needed. Even if doubled, EITC benefits for childless workers would still fall far below those received by working parents who are eligible to receive almost $6,000 a year. As a result, the proposed earnings bump may not be enough to induce meaningful changes in employment. Furthermore, the president’s plan does not address the significant marriage penalties that are embedded within the EITC.
In a recent paper, “Raising the Minimum Wage and Redesigning the EITC,” we proposed a more comprehensive set of EITC reforms.
Our proposal would increase the EITC benefit for childless workers to a little over $1,600 and extend their income-eligibility threshold to nearly $23,000. In addition, it would shift existing funding by providing more generous EITC benefits to families with young children (and somewhat less to large families). The fact that larger families also tend to have younger children would mitigate some of the impact of this change.
In addition, we would adjust program requirements to further incentivize marriage and employment. In particular, our plan would eliminate the marriage penalty for most households by making benefits based on personal instead of family income. Childless workers would need to work 1,500 hours a year (roughly 40 hours a week for three-quarters of the year) to be eligible for benefits, and secondary earners in families with children would need to be employed for 1,000 hours. To reduce costs and ensure that the program continues to be targeted at low-income individuals and families, we would limit worker credits for these two groups to households below 200 percent of the federal poverty line.
These reforms would cost about $10 billion a year. However, these costs could be offset by raising the federal minimum wage to $10.10 an hour, which would move people off of means-tested government programs and generate new tax revenue. Even under conservative assumptions, we estimate that combining a minimum-wage hike with our EITC reforms would reduce poverty by about 4 percent and lift nearly 1.8 million people out of poverty—all at no net cost to the government. The anti-poverty effectiveness of this hybrid plan would be further enhanced over the longer run if the new EITC encourages work and marriage or reduces unwed childbearing.
There are many ways to redesign the EITC. The president’s proposal and our own are just two of the many options. Both sides of the aisle agree that expanding the EITC (especially for childless workers) is a good move. The president’s budget proposal has put the issue back on the policy table, and lawmakers should use it as a starting point for building a better EITC.