We should expand America’s most successful anti-poverty program

Photo credit: www.lendingmemo.com
Photo credit: www.lendingmemo.com

This post is by OK Policy intern Haley Stritzel. Haley is a University of Tulsa student pursuing a Bachelor of Arts in Sociology and Women’s and Gender Studies.

In his budget plan for next year, President Obama has proposed expanding the Earned Income Tax Credit (EITC). Legislation has also been introduced in Congress to improve and strengthen the tax credit. Adopting these proposals would be a sensible move to reduce poverty while bolstering the economy.

The EITC benefits low and moderate-income families by offsetting federal payroll and income taxes. This tax credit is refundable, meaning that if the credit exceeds how much a worker owes, the worker will receive the leftover credit as a tax refund. The size of the tax credit depends on marital status, number of dependent children, and annual income. It increases with annual income up to a maximum level, about $37,900 to $51,600 for families with children, and then phases out at higher income levels. The average EITC benefit for families with children was $2,905 in 2011.

Throughout its history, the EITC has received wide bipartisan support as a valuable poverty-fighting tool and an alternative to welfare. Both sides of the aisle agree that the EITC is an effective means to lift families out of poverty: Paul Ryan praised the Earned Income Tax Credit as an effective anti-poverty program in a recent House Budget Committee Report, even while critiquing other federal programs.  In 2012, the combination of the EITC and the Child Tax Credit lifted 10.1 million people out of poverty, including 5.3 million children. At the state level, these tax credits lifted an average of 106,000 Oklahomans, including 65,000 children, out of poverty per year between 2010 and 2012.

Not only does the tax credit directly reduce poverty by supplementing a family’s income, it also indirectly alleviates poverty by encouraging work. Because the tax credit only applies to income earned from a job, the EITC creates an incentive for people to work more and earn a larger tax credit. According to a 2013 report by the Economic Policy Institute, the EITC increases the number of single mothers in the workforce. In addition, researchers have found that children whose families receive an additional $3,000 a year, a typical EITC benefit, on average increase their working hours by 135 per year and make 17 percent more annually between the ages of 25 and 37. Larger EITCs are also associated with better academic performance, higher high school graduation rates, and higher college attendance rates for children in low to moderate-income families.

Recent proposals would strengthen the EITC particularly for childless workers who currently receive only small benefits. First, the proposals would raise income limits for adults without dependent children to would qualify for the credit. Currently, single childless adults with incomes below $14,790 and married couples making below $20,290 are eligible for the tax credit. Under President Obama’s proposal, these income limits would increase to $18,070 for single taxpayers and $23,570 for married adults. The range of eligible ages for childless adults would also be expanded from between 25 and 65 to between 21 and 67.

In addition, these proposals would increase the size of benefits by approximately doubling the phase in/phase out rates from 7.65 percent to 15.3 percent. In other words, for each additional dollar of income, a worker would earn 15.3 cents towards their tax credit up to a maximum income level. The tax credit would decrease at this same rate as income further increases. The proposals would also increase the maximum credit from about $503 to $1000 in Obama’s proposal and up to $1,400 in the other Congressional bills.

For example, under current law, an adult without dependent children who works full time at the minimum wage ($14,500 a year) only receives an EITC of $22. Under Obama’s proposal, their benefit would increase to $542

According to an estimate released by Brookings, approximately 14 to 15 million people would benefit from these proposals, either by receiving a larger credit or becoming newly eligible. This expansion would overwhelmingly benefit service sector workers in metropolitan areas, including Tulsa and Oklahoma City.

In 2011, the EITC put about $821 million into Oklahoma’s economy, with 358,415 Oklahoman households receiving the credit. Under Obama’s proposed EITC expansion, an additional 150,000 individuals in the state would benefit from the credit. The EITC is a smart tool for alleviating poverty that reduces income inequality while benefitting the economy as a whole. An expansion would significantly improve the well-being of hardworking citizens while encouraging greater labor participation and broad economic growth.

 

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