How to Raise Both Take-Home Pay and Tax Fairness

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Budget watchers of differing political stripes have recognized that if there’s one idea from the President’s budget that might have some bipartisan legs it’s the proposed expansion of the earned income tax credit (EITC) for childless, adult workers.

The EITC is a highly successful and politically popular antipoverty program that lifts the wages of low-income workers.  In 2012, these extra earnings helped to lift 6.5 million people, including 3.3 million children, out of poverty.  And research finds the program to be powerfully pro-work.

But the credit has a hole when it comes to childless adults.  The average family with kids ends up with around $3,000 from the credit but for childless workers, the average credit amounts to less than $300.  Yes, families with kids need more resources, but it’s hard to argue the policy is “making work pay” for low-wage workers without kids.

The President’s proposal would expand this part of the credit significantly, by both increasing the size of the subsidy and expanding the eligibility criteria to include more workers.  The figure below shows just how much that expansion would mean for two types of workers.

For someone whose earnings put her at the poverty lineâ€"around $12,500â€"the credit would jump from about $170 to $840; a full-time minimum wage worker receives virtually no benefit from the current EITC, but under this proposal, her income would rise by $540.

Center on Budget and Policy Priorities *Estimate by Center on Budget and Policy Priorities based on 2013 official poverty line.
Source: President’s Fiscal Year 2015 Budget; Internal Revenue Code.

So this is very big deal for a sizeable number of folks.  The White House estimates that it will lift the earnings of 13.5 million low-wage workers.

But there’s another motivation for this change that is little known.

Our current federal tax system reduces the poverty rates of families with children, but raises poverty for those without.  In 2012, federal taxesâ€"including credits like the EITC and the child tax creditâ€"helped to reduce poverty among non-elderly households with children by 3.7 percentage points.  But for childless workers, that same system increases their poverty rate by 1.4 points.

The President’s proposal doesn’t fully erase the tax burden for every one of these workers, but it significantly reduces it.  And given the increases shown in the figure above, any childless worker with income well below the poverty line would find their federal tax liability fully offset by the proposal.

I should also note that the proposal’s $60 billion (over ten years) price tag is paid for by closing a couple of tax loopholes that benefit the wealthy, like the carried-interest loophole whereby the earnings of investment fund managers get favorable treatment in the code such that they end up paying a smaller share of their income in taxes than many middle-income workers.

What with that whole (ridiculous) “makers and takers” argument that came up in the last election, it might surprise you to find that, in fact, our tax systemâ€"including both payroll taxes and income taxesâ€"actually does hit some very low-income workers.  Here’s a good way to do something useful about that while increasing the fairness of the tax code at both ends.