CBPP on Tax Reform and Poverty

In all the talk about tax cuts, economic growth and the need to encourage savings and investment, American families at or near the poverty line often get left out.  Yet we are in a period of contradictions--a country with the most powerful military in the world has pockets of poverty that do not go away with growing income and wealth inequality that includes runaway growth for the super-rich at the very top and a stagnant economy for those at the bottom.  As the latest Center on Budget and Policy Priorities (CBPP) study on poverty shows, over the thirty years from 1973 to 2003, "real hourly wages for men at the 10th percentile of the earnings distribution fell 3 percent....[while]wages for workers at the 90th percentile rose 22 percent." See Jason Furman, Tax Reform and Poverty, CBPP, Apr. 20, 2006.

The report highlights the importance of the earned income tax credit and additional child tax credit in softening the impact of declining wages for those ordinary Americans stuck at the bottom of the income distribution. 

"The economic blow for families at the bottom of the income spectrum was partially cushioned by several expansions in the EITC which more than account for the entire 7 percent growth in after-tax incomes for the bottom quintile over this period [from 1973 to 2003]."  Id.

The report notes some of the advantages of the EITC as well as some of the ways it fails to address the problems.

• PRO:  The EITC kept 4.4 million people from falling below the poverty line in 2003.
• PRO:  The EITC increases labor force participation by single mothers.
• PRO:  The EITC makes a significant difference for familes with two children and a substantial difference for those with a single child.
• CON:  The poverty rate for families with three or more children is double the rate of families with fewer than three children, in part because the EITC does not increase when there are more than two children.
• CON:  Childless families are faring less well compared to families with one or two children, because the EITC benefit is significantly less for childless families.   
• CON: The EITC does not provide an incentive for childless young men to participate in the labor force.
• CON:  The design of the EITC creates a substantial marriage penalty for many two-earner couples.

The report suggests that the effectiveness of the EITC could be improved by addressing the specific problems highlighted above.  The payment for families with three or more children could be increased, although the additional amount would still fall short of the amount needed to stay above the poverty line.  To address the fact that childless workers are falling behind--and in particular the disincentive for young men to work--the report suggests tripling the credit to $1,236.  The marriage penalty might be reduced by raising the phase-out point for married couples by an additional $2000.

Alternatively, a modified version of the consolidated credit system proposed in by the Advisory Panel on Tax Reform could be adopted.  The report suggests simplying the tax structure and increasing compliance by creating two integrated credits: a work credit and family credit.

The merits of the particular proposals are certainly subject to debate, but it is important that the dialogue be engaged.  This country can afford to provide the best education in the world to every one of our children.  We should also ensure that the EITC provides sufficient funds to encourage young people to work and help young families who are working hard but having trouble making ends meet to care for themselves and their children.  In the long run, the social bonds that draw us together will be stronger and we will be a better society for giving poor families a helping hand.

Comments

[David F. Prenatt, Jr.]

By far the biggest problem with the EITC is the fact that so many people who are eligible for EITC benefits are not even aware that the program exists. See http://blog.netesq.com/2006/07/why-is-earned-income-tax-credit-such.html