August 15, 2019

Comparing Two Ways to Improve the Earned Income Tax Credit

August 15, 2019

After Social Security, the earned income tax credit (EITC) is America’s largest antipoverty program. The refundable tax credit supports low- and middle-income families, lifting nearly 5.8 million people out of poverty each year.

But childless workers, including noncustodial parents, are largely excluded from the program’s benefits. In 2017, the Urban-Brookings Tax Policy Center estimated that 97 percent of benefits were distributed to families with children.

“If you’re a worker but don’t have a child living with you, you’re probably not going to receive a benefit from the EITC,” said Elaine Maag, principal research associate at the Tax Policy Center.

Democratic presidential candidates and lawmakers have proposed expanding the EITC or implementing new tax credits. What are the options to improve the EITC to benefit more workers?

On the latest episode of the Urban Institute’s podcast, Critical Value, Institute fellow Len Burman and the Economic Security Project’s cochair Chris Hughes discuss two approaches to overhauling the EITC. Both proposals seek to address the EITC’s limitations and provide a more substantial credit toward childless workers.

Option 1: Guaranteed income

Hughes’s proposed plan would provide up to $500 guaranteed monthly income to individuals or households earning $50,000 or less. “What I’m talking about is an [income] floor that is meant to be supplemental to other income from wages or other government programs that guarantee a basic level of economic security,” he explained.

“Cash as an intervention also respects [workers’] freedom and dignity as an individual to chart their own path,” he added. “What you need is not only for people to have money but also a set of places to spend that money or to invest in. That’s why it’s important to talk about cash transfers as a unique way to empower people to have the freedom to choose.”

Hughes also proposes to expand the definition of work by allowing caregivers and full-time college students to be eligible for credit.

To pay for this, Hughes proposes a 50 percent tax for Americans earning more than $250,000.

Single filers earning more than $200,000 are currently taxed at 35 percent, and joint filers earning between $165,000 and $315,000 are taxed at 24 percent.

Option 2: Universal EITC

Burman’s proposal for a “Universal EITC” would expand the EITC’s eligibility range age include to any working person age 17 or older. It would also apply 100 percent of earnings to a maximum work credit of $10,000 and increase the child tax credit from $2,000 to $2,500, making it available to all people, regardless of earnings. The Universal EITC would provide the option to receive monthly or annual benefits.

“The EITC is really complicated because of the way it combines kids and earnings to calculate the subsidy,” said Burman. “If you want to support work, then why not support work? Why tie it to kids?”

Noncustodial parents are often “single men with children who they don’t live with,” explained Burman. “If you subsidize them, they’re more likely to stay engaged in the workforce, build human capital, be better role models for their kids, and stay better connected with their families.”

Because Burman’s proposed work credit is based solely on individual earnings, married workers would receive a credit based on their separate earnings rather than a combined income.

“One thing the tax system does is discourage lower-earning spouses from going into the workforce because they’re taxed at a really high rate. It makes those people vulnerable because if you don’t have an earnings history and the marriage falls apart, you don’t have the skills to support yourself,” he explained.

Unlike Hughes’s proposal, under the Universal EITC, those without an income, like caregivers and full-time students, would be ineligible to receive credit. Burman also suggests adding an 11 percent value-added tax to pay for the Universal EITC.

Many in Congress have shown interest in expanding the EITC or implementing a new tax credit, including presidential candidates (and senators) Kamala Harris and Cory Booker. Others not running for president, including Senator Sherrod Brown and Representative Ro Khanna, have announced similar proposals.

Restructuring the EITC for all working individuals could provide millions of Americans greater financial stability. The proposals offered by Burman and Hughes underscore a broader discussion of how America supports its workers, including those without children.

Candidates are reflected in the stage ahead of the second round of the second Democratic primary debate of the 2020 presidential campaign season in Detroit, Michigan on July 31, 2019. (BRENDAN SMIALOWSKI/AFP/Getty Images)

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