What Tax Credits Do – or Don’t Do – for Low-Income Families
Last week, the Census released the official poverty numbers for 2010. The proportion of people in poverty (15.1 percent) reached its second highest point since 1965, and the proportion of people living in deep poverty (half the poverty level) was the highest level since 1975 – 6.7 percent. The poverty line equaled $17,568 for a single parent with two children. The official income counted to determine poverty is money income before taxes and tax credits. It excludes capital gains and non-cash benefits (so Temporary Assistance for Needy Families counts, but food stamps don’t).
For some families, tax credits boost income significantly. In 2010, the biggest credits were the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and the Making Work Pay credit (MWP). The first two assist families with children almost exclusively. Individuals without children get only about 3 percent of EITC benefits and they get nothing from the CTC. In contrast, MWP provided benefits to all workers and their spouses, regardless of whether or not they have children, but it expired at the end of 2010. In 2011, MWP was replaced with a payroll tax cut that is scheduled to expire at the end of 2011, but President Obama has proposed expanding it and extending it.
Although tax credits encourage work and subsidize low wages for families with children, they do little for low-income childless families. In 2010, a single parent with two children with poverty level earnings received a 41-percent income boost ($4,800 EITC, $2,000 CTC, and $400 MWP). At half-poverty, the subsidy jumps to 54 percent ($3,500 EITC, $868 CTC, and $400 MWP). If these credits were counted in the official poverty estimate, they would lift many working families out of poverty – and we ought to protect that piece of the social safety net now.
But today’s tax credits don’t give full benefits to all poor households. Individuals must have earnings—sometimes substantial earnings—to benefit from any of these credits. Families must have at least $3,000 of earnings to get the CTC, for example, and a family with two children doesn’t receive its full $2,000 child credit until earnings exceed $16,333. Phasing the CTC in from the first dollar of earnings—as the EITC and MWP do—would give a $1,318 CTC to a family earning just $8,784 (the threshold for a family of 3 in deep poverty). Alternatively, a higher phase-in rate would deliver the full credit at lower earnings level. In any case, none of the three tax credits provides benefits to individuals who are not working.
In budget talks, policy makers must not only protect the low-income assistance now offered through the tax system, but must also make sure there’s not a gaping hole at the bottom, like what we now have for childless individuals. The Super Committee should be motivated by these continued high poverty rates and use this opportunity to provide a sufficient safety net for everyone.
[...] In reaction to last week’s Census data showing rising poverty across the country, Elaine Maag from the Tax Policy Center outlines both the benefits and limitations of tax credits in helping working families make ends meet. (TaxVox) [...]
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The first provision to be protected is the $1000 child tax credit. I agree with proposed improvements you suggest and will go one better – mortgage interest deduction repeal should not be used to cut the deficit, but to increase the child tax credit and make it fully refundable. The child exemption should also be repealed and replaced with a bigger CTC.
At some point, however, we need to not use tax policy to supplement companies who underpay workers. The minimum wage must be increased. Employers who can’t justify a fair wage should not be in business, as I am sure the owners and managers probably still make such a wage.
I can also see doing alternatives to employment – especially if a higher minimum is madated. Everyone who is less than literate in English at the 10th grade level should be entitled to remedial education (without regard to immigration status – and frankly – most immigration law’s main purpose is to provide off the books employees to the food industry, from field to factory) and be paid for their time while attending training, also at a higher minimum wage. For the literate, paid apprenticeships/VoTech training or collegiate education should be available as well, preferably funded by future employers in exchange for tax preferences.
Doing all this takes tax reform like a Net Business Receipts Tax (basically a VAT with tax expenditures like a child tax credit and education credits, as well as health credits or exclusions), where most families would not pay or file individual income taxes at all and would have a higher net and lower gross pay so that they can afford the VAT and their employers could afford the NBRT.
I have a tax plan that does that, if you would like to talk about it.
Michael you have absolutely no idea about business. Employers pay according to what the employee is worth. Ultimately if you have, say an artificially high minimum wage like $15 you would severely reduce US employment. A business, will obtain goods from the country that produces it the most economically. Do not blame a company if a Chinese Widget costs $5 and a US widget is $8. If you add all your taxes and wage restrictions and healthcare mandates you will only widen the disparity. Add in legal issure, labor laws and it only gets worse. you want to change this try any of these things: no internet, very expensive shipping on air or ocean, tarriffs, complete subsidizing of all US Labor costs. Frankly, I can not see any of this. If we follow your system I can see unemployment of 15% and a permant underclass paid by the government.