WASHINGTON – President Barack Obama’s recent proposal to increase the earned income tax credit to include 13.5 million unmarried workers may be his best bet to achieve his goal of combatting income inequality and getting more Americans out of poverty.
His proposed $3.9 trillion budget, released March 4, would expand the earned income tax credit program, now aimed at low-income couples, to childless workers.
Obama also has pushed for raising workers’ wages. He issued an executive order in February increasing federal workers’ minimum wage to $10.10. He also backs legislation in Congress to increase the U.S. minimum wage to $10.10.
All of these efforts are aimed at reducing income inequality and moving more people out of poverty, but some Republicans are more open to EITC expansions than increasing the minimum wage.
Glenn Hubbard, who served on President George W. Bush’s Council of Economic Advisers, said Obama’s commitment to increase minimum wage “offers little hope for the success he seeks,” but that tax reforms like the EITC could help.
“Increasing the credit for childless workers to an amount closer to that for families with children would augment the direct work incentive and help counter poverty among the working poor,” he wrote in a Washington Post op-ed.
While minimum wage has steadily increased in the past, the last major expansion to EITC was more than 20 years ago.
How to claim EITC
The earned income tax credit program was first introduced in 1975 and has been adjusted since for changes such as lowering taxes or increasing subsidies. The program largely helps low-income individuals with children because the amount of EITC increases based on number of children.
In order to qualify for the program, a person must have a Social Security number and earned income: wages, salaries, tips or benefits.
People who receive the EITC must have incomes within the limits of the program. If someone is single with three or more children, they cannot earn more than $49,997. But if a married couple has no children, their income may not exceed $20,020.
The American Tax Relief Act of 2012 increased the credit for married couples and parents of three or more children.
In 2013, a person with no children earning $11,670 or less, which is the poverty level, received an EITC of $487, but a person with the same income and three children got $5254.
The system sets a fixed percentage from every dollar earned until the maximum amount of credit is reached it.
For those who qualify for an EITC, the maximum credit ranges from $6,143, for married couples or singles with three or more children to $496 for people with no children.
When a person earns the most credit possible, the amount of credit plateaus and eventually starts to decline. At the end of the “phase-out range,” the credit moves toward zero.
Graph from the Tax Policy Center.
Getting Americans over the poverty line
Gordon Berlin, president of New York social policy research organization MDRC, said that the earned income tax credit plays a large part in decreasing poverty.
MDRC plans on stimulating New York City’s EITC program by partnering with the city’s Center for Economic Opportunity on Paycheck Plus, which is a project designed to help low-income, single workers without dependent children.
MRDC representatives said more jobs could be created by expanding EITC.
A recent study published by the Center on Budget and Policy Priorities showed that EITC recipients have increased their hours working or worked harder to get higher wages, which has paid off, especially among mothers with young children or lower education. “The EITC expansions of the 1990s induced more than a half a million families to move from cash welfare assistance to work,” the study said.
Investing in the proposed earned income tax credit expansion would have a similar effect now, according to Gene Sperling, director of Obama’s National Economic Council. The original EITC, launched in 1975, decreased poverty rates when it was introduced, pulling 1.4 million Americans out of poverty.
“The EITC has been the most powerful engine to get people out of poverty and into work,” Treasury Secretary Jack Lew said in a Senate Finance Committee hearing earlier this month.
But Obama said during his State of the Union address that the EITC still “doesn’t do enough for single workers who don’t have kids” and that he planned to do more.
His proposed expansions would benefit workers without children and noncustodial parents to “extend opportunity for all Americans,” Office of Management and Budget Director Sylvia Burwell said at a budget news briefing last week.
Under the president’s plan, the EITC for individuals living at the poverty level would receive $974 in EITC, four times as much as the $239 they receive now. Nearly 6 million Americans would receive their first subsidies, and another 7.7 million would benefit even more from the program, according to Sperling.
“For those who are serious about not just talking the talk but walking the walk on reducing poverty and helping low-income working families, they should support the president’s initiative on earned-income tax credit,” Sperling said.
According to the president’s plan, these expansions would be funded by “closing loopholes for overseas tax evasion” instead of adding new taxes, he said.
The case for minimum wage
Another reform suggested by White House officials to combat income inequality is increasing the minimum wage, but the measure isn’t receiving as much support from Republicans.
Minimum wage “provides a boost to [workers’] income that both helps them make ends meet and increases spending in the broader economy,” said Sperling and Alan Krueger, research associate at the National Bureau of Economic Research.
Minimum wage reduces “churn,” or job turnover. It reduces the costs of hiring and training new employees.
But raising minimum wage could do more harm than good, economists at an American Enterprise Institute panel said. Employers could soon realize that investing in technology that replaces janitorial and low-salary jobs wouldbe more economical than paying workers a higher salary, said San Diego State University Professor Joseph J. Sabia.
For example, the third most-common job in the United States is food preparation worker. This occupation has the lowest annual salary, according to the Bureau of Labor Statistics. If the minimum wage increased, managers and company executives could replace human workers with robots or machines that prepared food in restaurants or fast food chains.
Jonathan Meer and Jeremy West from Texas A&M University’s Department of Economics conducted studies for the National Bureau of Economic Research on this topic. “We find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments,” said Meer and West in a research paper.
