PROBLEMS ADDRESSED: Poverty, Income & Wealth Inequality

SOLUTION: Expand the Earned Income Tax Credit

Related Solutions: Expand Adoption of ESOPsIncrease Taxes on the WealthyLimit Executive Compensation, Raise the Minimum Wage

Last updated: Jan. 5, 2017

There are many factors beyond public policy that affect upward mobility. But public policy is still a factor, and government has a role to play in providing a safety net and expanding opportunity for all.

–Speaker of the House Paul Ryan, from the Introduction to his discussion document, “Expanding Opportunity in America

Introduction

The Earned Income Tax Credit (EITC) is a tax credit created to improve the incomes of low income workers by granting them an annual tax credit. It specifically applies only to people who work and file for income tax. The EITC has been successful at increasing employment (and thereby improving incomes). In 2014, the EITC, in combination with the Child Tax Credit (CTC), lifted 10.6 million people out of poverty, including about 15% of poor families with children. It improved the incomes of another 21.1 million people who, nonetheless, remained in poverty . Another 15 million people in poverty were unaffected by the EITC. Using a sliding scale that relies on filing status (single/head of household or married), number of children, and wages, the maximum amount paid by the EITC in 2015 was $6,242 per family.

The EITC is one of a number of programs created by the federal government to help low to moderate income families, seniors, children, and people with disabilities obtain basic necessities like food, clothing, and housing, plus at least some minimum level of healthcare and improved educational outcomes. Results produced by the EITC are generally reported as an aggregate of outcomes produced by the EITC and the CTC, which provides for a refund up to $1,000 per dependent child. Both programs are recognized as contributing to long-term health benefits and economic success for qualified participants. According to the Center on Budget and Policy Priorities, “Next to Social Security, the EITC combined with the refundable portion of the CTC constitutes the nation’s most powerful anti-poverty program.”

In an opinion piece in the Wall Street Journal, Warren Buffet, the long-time sage of sound, value-based money management, addressed the issue of income inequality by recommending “a major and carefully crafted expansion of the Earned Income Tax Credit (EITC).” He favors such an expansion over raising the minimum wage, which he believes would dramatically hurt employment. Recognizing that EITC is a far from perfect solution that is already in need of substantial improvement, Buffet argued that “the goal of the EITC—a livable income for everyone who works—is both appropriate and achievable for a great and prosperous nation.”

Progress Updates

Missouri Passes ESOP Legislation

Overriding the veto of Governor Jay Nixon, the Missouri General Assembly passed the Stock Ownership Deduction Act (HB 2030), which allows a company to defer up to 50 percent of the taxes ...
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Incomes Surge, Poverty Down Slightly

Today's headlines seized on highlights from a US Census Bureau report, Income and Poverty in the United States: 2015, excitedly extolling the good news that household incomes "surged" (Wall Street Journal), "soared" (Washington ...
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Right Finds Common Ground with EITC Proposal

While Bernie Sanders is justly credited with turning the media and political spotlight on the problem of income inequality, conservatives have, indirectly, taken their seats at the table to open discussions on finding ...
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Learning Gap Is Closing Despite Income, Wealth Inequalities

A new study from Stanford University supports the surprising conclusion that children from wealthy and poor families are entering kindergarten with a closer capacity for achievement than in the past.  The ...
Read More

Alternative Views

Raise the Minimum Wage Instead

MinWageNotEnough+captionThe EITC exists, in part, because too many workers are not paid a livable wage, and many who earn the minimum wage fall below the poverty line. According to the US Bureau of Labor Statistics, nearly three million workers earned the minimum wage or less in 2014.

Some have argued that the EITC and other federal assistance programs like SNAP, which provides food stamps to those in need, amount to tax-payer subsidies of companies that are unwilling to pay their employees enough to live in the communities where they work. Rather than continue these large subsidies, this line of reasoning instead supports raising the minimum wage to at least $12 an hour.

While such a raise would not necessarily eliminate the need for the EITC, it would substantially reduce the number of people who would qualify for it, and so, would also reduce the number of taxpayer dollars spent on this program.

Read more about raising the minimum wage.

Mechanisms for Getting Something Done

A number of mechanisms have been suggested for increasing taxes on the wealthy. Each is briefly summarized below. We invite you to review each one. Please feel free to suggest another mechanism that we have not yet covered. In time, we will offer an option for you to tell us which options make the most sense to you.

Improve coverage of childless workers

The EITC was primarily designed to help reduce the tax burden on families with children. For this reason, it provides very little assistance to childless workers, offering a maximum refund of $503 and lifting barely 1% of them out of poverty. A childless worker may be single or married and has no children or is a non-custodial parent.

A first step to improving the EITC would be to address this gap in coverage and increase the tax credit for childless workers. The Center on Budget and Policy Priorities reports that President Obama’s 2016 budget proposal and House Speaker Paul Ryan’s “Expanding Opportunity in America” advanced very similar proposals that would reduce by about 5.8 million people the number of childless workers who would otherwise fall into or deeper into poverty by paying their federal income and payroll taxes.

Several proposals were made in the 114th session of Congress, but none became law. According to the Center on Budget and Policy Priorities, no eligible childless worker would have been taxed into or deeper into poverty under the proposals of Senator Sherrod Brown and Representative Richard Neal noted in the figures below.

ComparisonProposals ProposalsBoostEITC

Make residents of Puerto Rico eligible for EITC

Currently, residents of Puerto Rico are not covered by the EITC. Because Puerto Rico’s labor force participation is substantially lower than in the 50 states and the District of Columbia, the EITC’s success in drawing people into the labor force is a strong argument in favor of the proposed expansion. At least two proposals were put forward in the 114th Congress recommending this approach.

On the other hand, as Rachel Greszler at the Heritage Foundation pointed out, Puerto Ricans do not pay federal income tax, which makes the idea of extending an earned income tax credit a bit of a non-sequitur. After all, how do you extend a tax credit to people who do not pay tax?

Increase the number of states with EITC

States can establish their own EITC to supplement the federal program, and in fact, 26 states plus the District of Columbia. The following tables identify those states that do not have their own EITC supplement and those that do.

StatesWithEITC StatesWoutEITC

There are many ways that we as individuals can substantively influence the expansion of the EITC. Below we list a few ideas along with resources that can help you become a more informed and engaged shareholder, business person, voter – and maybe even an American leader. Our list is not comprehensive, so if you have other ideas or know of another resource that belongs here, please let us know.

Track and support proposed legislation

Several proposals were made in the 114th session of Congress to increase the tax credit for childless workers and to make the residents of Puerto Rico eligible for EITC. None were passed into law. These are listed in the table below. By clicking the links, you will open a page in GovTrack where you can learn more about each bill and contact your senators and representative to express your views.

We will update this page as new proposals are made in the current session of Congress.

Proposals to Increase the Tax Credit for Childless Workers
Current legislative efforts to expand the EITC
S. = “Senate Bill” | H.R. = “House of Representatives Bill”
Name Status Sponsor Purpose
S. 1012: Working Families Tax Relief Act of 2015 Referred to committee; GovTrack gave it 0% chance of being enacted Sen. Sherrod Brown Strengthen the earned income tax credit and make permanent certain tax provisions under the American Recovery and Reinvestment Act of 2009
H.R. 902: Earned Income Tax Credit Improve-ment and Simplification Act 2015 Referred to committee; GovTrack gave it 2% chance of being enacted Rep. Richard Neal Strengthen the EITC for individuals with no qualifying children, and for other purposes.
H.R. 4946: EARN IT Act Referred to committee; GovTrack gave it 3% chance of being enacted Rep. Mike Coffman Provide for an increase in the earned income tax credit for individuals with no qualifying children, and for other purposes
S. 2327: Foster EITC Act of 2015 Referred to committee; GovTrack gave it 1% chance of being enacted Sen. Bob Casey Strengthen the earned income tax credit and expand eligibility for childless individuals and youth formerly in foster care
H.R. 1757: Tax Fairness for All Families Act of 2015 Referred to committee; GovTrack gave it 0% chance of being enacted Rep. Jerrold Nadler Provide an increasingly larger earned income credit for families with more than 3 children
GovTrack.us, accessed August 23-24, 2016.
Proposals to Make Residents of Puerto Rico Eligible for EITC

Two bills in Congress were targeted at giving EITC coverage to the residents of Puerto Rico, who currently are not covered by the legislation.

Current legislative efforts to expand the EITC
S. = “Senate Bill” | H.R. = “House of Representatives Bill”
Name Status Sponsor Purpose
H.R. 4213: Tax Equity and Prosperity for Puerto Rican Families Act of 2015 Referred to committee; GovTrack gave it 1% chance of being enacted Rep. Bill Pascrell, Jr. Make residents of Puerto Rico eligible for the earned income tax credit and to provide for equitable treatment for residents of Puerto Rico with respect to the refundable portion of the child tax credit.
S. 2203: Earned Income Tax Credit and Child Tax Credit Equity for Puerto Rico Act of 2015 Referred to committee; GovTrack gave it 1% chance of being enacted Sen. Bob Menéndez Make residents of Puerto Rico eligible for the earned income tax credit and to provide equitable treatment for residents of Puerto Rico with respect to the refundable portion of the child tax credit
GovTrack.us, accessed August 23-24, 2016.

Support a State-level EITC

Visit USA.gov to contact your federal, state, and local elected leaders and let them know where you stand on income inequality and the solutions we’ve discussed here, including the EITC. Whether or not your state has an EITC, let your state and local leaders know whether you support the idea, and where it ranks in your view as a solution to income inequality. Ask questions and engage them in conversation about all the solutions discussed here. Find out what solutions they favor, and what they are doing to address this problem in a substantive way.

Too many people think their voices don’t matter but that’s only true if they complain to their friends and family and not to their elected representatives. Speak your mind to the people who can do something about the problem, and let them know you’re watching how they vote on the proposed legislation. That’s how you make your voice matter.

Vote, and vote smart!

After talking to your elected representatives, usually via their staff, chances are that sooner or later you’ll get a chance to vote for their re-election. If you believe that reducing income and wealth inequality is a top priority for this country, then make sure you know whether your candidate has done anything to address it. Follow up with him or her after you’ve voted to let them know how you voted and why.

You can learn what the candidate’s positions and voting records are at VoteSmart.org. Founded in 1988, Project VoteSmart provides free, factual, unbiased information on candidates and elected officials to all Americans. It aims to give you the information you need to … well … vote smart.

Learn more

This brief only scratches the surface of the information available on the EITC and income inequality. If you’d like to get some more detail, take a look at the following:

Policy Basics: The Earned Income Tax Credit. This brief article from the Center on Budget and Policy Prioirities offers a good introduction to the EITC and an interactive chart that allows you to input the variables that affect how much credit a family receives.

Expanding Opportunity in America. Download Speaker Ryan’s discussion draft from the House Budget Committee website. Chapter 2 addresses the EITC.

Sources

Income and Poverty in the United States: 2014, U.S. Census Bureau, September 2015, http://www.census.gov/library/publications/2015/demo/p60-252.html. Accessed August 28, 2016.

Center on Budget and Policy Priorities, “Chart Book: The Earned Income Tax Credit and Child Tax Credit”, updated May 24, 2016, http://www.cbpp.org/research/federal-tax/chart-book-the-earned-income-tax-credit-and-child-tax-credit. Accessed August 22, 2016.

Williams, Erica, “States Can Adopt or Expand Earned Income Tax Credits to Build a Stronger Future Economy”, Center on Budget and Policy Priorities, January 19, 2016, http://www.cbpp.org/research/state-budget-and-tax/states-can-adopt-or-expand-earned-income-tax-credits-to-build-a. Accessed August 25, 2016.

Frentz, Nathaniel, “A State-by-State Look at the EITC and Child Tax Credit”, Center on Budget and Policy Priorities, March 5, 2014, http://www.cbpp.org/blog/a-state-by-state-look-at-the-eitc-and-child-tax-credit. Accessed August 23, 2016.

Buffett, Warren, “Better Than Raising the Minimum Wage”, Wall Street Journal, May 21, 2015, http://www.wsj.com/articles/better-than-raising-the-minimum-wage-1432249927. Accessed

Cooper, David, “The Minimum Wage Used To Be Enough To Keep Workers Out Of Poverty—It’s Not Anymore”, Economic Policy Institute, December 4, 2013, http://www.epi.org/publication/minimum-wage-workers-poverty-anymore-raising/. Accessed September 3, 2016.

TAX POLICY: Analysis of Certain Potential Effects of Extending Federal Income Taxation to Puerto Rico, US Government Accountability Office, GGD-96-127: Published: Aug 15, 1996. Publicly Released: Sep 5, 1996, http://www.gao.gov/products/GGD-96-127. Accessed October 2, 2016.

Greszler, Rachel, “Congress Should Not Give Puerto Rico Federal Tax Subsidies”, The Heritage Foundation, March 22, 2016, http://www.heritage.org/research/reports/2016/03/congress-should-not-give-puerto-rico-federal-tax-subsidies. Accessed October 2, 2016.

Policy Basics: The Earned Income Tax Credit, Center on Budget and Policy Priorities, Updated October 21, 2016, http://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit.

Ryan, Paul and House Budget Committee Majority Staff, Expanding Opportunity in America, US Congress, July 24, 2014. http://budget.house.gov/uploadedfiles/expanding_opportunity_in_america.pdf