Earned Income Tax Credit Shorts Childless Workers

Seems we’ve got a comprehensive tax reform effort underway in both the House and the Senate. It’s a genuine effort and, to some extent, bipartisan.

Nothing may come of it — in this Congress at least. But we could have a better tax code, even without a total overhaul.

Everybody agrees that the tax code is way too complicated. But, as I’ve written before, there’s a big divide on what should be done with revenues gained by closing loopholes, eliminating exclusions and the like.

And every single tax break got into the code because some interested parties wanted it there. Probably still do, as the Washington Post‘s report on the lobbying blitz indicates.

That said, there just might be an opportunity to make some changes that would help grow the economy, make the tax code fairer and promote other important policy objectives — the three criteria for “special provisions” laid out by the Senate Finance Committee Chairman and top-ranking Republican member.

One good candidate is the refundable Earned Income Tax Credit. This is a tax break that’s already got a lot going for it.

The EITC puts — or at least, leaves — more money in the pockets of low and moderate-income families. This is more money they can spend. And those who get refunds generally do. Some boost to the economy here.

The EITC is also a powerful anti-poverty measure. It lifted about 6.1 million people out of poverty in 2011.

Whether it also reduces poverty by encouraging work is a more complex issue. It certainly seems to have done so among mothers in the Temporary Assistance for Needy Families program, who got a bonus of sorts by moving from welfare to work.

Yet the EITC could use some retooling.

Much has been written about the marriage penalty built into the rules, i.e., the fact that some single parents wind up with greater tax burdens when they marry.

We see much less discussion of another sort of penalty that reforms could address — specifically, the disadvantageous treatment of childless workers.

A new report from the Center on Budget and Policy Priorities provides details.

Briefly, childless workers under 25 aren’t eligible for the EITC at all — even if they’re wholly dependent on what they earn. Perhaps also supporting someone else as well.

I mention this in part because “childless,” for the purposes of the EITC, means no child living with you for more than half the year. So parents paying child support will often be ineligible.

For childless workers so-defined, the full credit is very small — 7.65% of earned income. This is less than a fourth of the rate for workers with just one child.

The income basis for the credit hits the maximum at $6,370 and stays there only until the worker earns $7,970. Within this narrow window, the credit itself is a piddling $497, as compared to $3,250 for a worker with one child.

The credit then begins to phase out. For childless workers who aren’t filing jointly, there’s no credit left when earnings hit $14,340, i.e., when they’re earning less than a full-time minimum wage.

The so-called break even, i.e., zero credit, point is $37,870 for single filers with a child and even higher for married couples filing jointly.

The CBPP analysis assumes that a full-time minimum wage worker earns $14,500 a year.* Because this is higher than the break even point, the worker will have a federal tax burden of at least $1,109.

It’s more than double that if you count the employer’s share of payroll taxes, as CBPP apparently prefers.

Counting that share, a worker with wages at the projected 2013 official poverty level will owe $1,186. Thus, says CBPP, “childless workers are the lone group that the federal tax system taxes into, or deeper into, poverty.”

It cites diverse experts to argue for the virtues of a less stingy EITC for childless workers.

We’d perhaps see more young men in the formal labor market because low-wage work would be more rewarding for them. More older men with less than a high school education there too — and for the same reason.

This, says Ron Haskins at the Brookings Institution, would make them better marriage prospects — obviously assuming that they’re not just in the labor market, but gainfully employed.

We’d then have fewer of those single-mother households that many find so worrisome, he suggests. Less crime and other anti-social behaviors too. Healthier, higher-achieving kids, CBPP adds.

All this seems to me a lot to claim, even tentatively, for some fairly modest changes in a federal tax credit like the EITC reforms in the pending House and Senate bills that CBPP endorses.

And I don’t think we need to go so far.

The proposed drop in the EITC eligibility age for childless workers, plus the quicker phase-in and higher maximum credit for them would clearly make the tax code fairer and promote other important policy objectives.

CBPP estimates that these changes would lift more than 300,000 childless workers out of poverty and reduce the severity of poverty for 3.8 million more.

That’s good enough for me.

* This is $580 lower than the commonly-cited figure for what a full-time, year round worker at the federal minimum wage level earns. CBPP clearly assumes fewer hours, but I don’t know why.

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2 Responses to Earned Income Tax Credit Shorts Childless Workers

  1. […] as I’ve written before, the EITC shortchanges childless workers. Those under 25 aren’t eligible for the […]

  2. […] takes note of the disadvantages the EITC poses for childless workers — and for workers whose children haven’t lived […]

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