Questions About Expanding the Childless EITC

By :: February 5th, 2014

As the idea of expanding the “childless EITC” gathers steam, it’s time to start thinking about what the next generation of worker credits should look like. Today’s EITC lifts millions of families out of poverty each year by providing a wage subsidy that encourages work. But it largely skips over childless adults. Politicians from President Obama to Senator Marco Rubio (R-FL) are looking at ways to include workers without kids in the EITC or an EITC-like program.

Today, the maximum childless EITC benefit is just $496, less than a tenth of the $5,460 available to families with two children. And what’s more, if you don’t have children, you have to be very low-income to qualify for any benefit at all. Families with two children can receive the EITC until their earnings reach $43,756 ($49,186 if married). But families without children get nothing once they earn $14,590 ($20,020 if married).

There’s no doubt that a significant expansion of the childless EITC could reduce poverty and differences in the tax treatment of families with and without children. (And many workers who do not report children on their tax returns actually do have children, though they may not live with them.)

But before legislators double down on the EITC for childless families, they must get a handle on some yet-to-be answered questions.

First, should we retain the current age limits for the childless EITC? Although a parent at any age who lives with their child can receive the EITC if they meet the other eligibility rules, folks without children must be between the ages of 25 and 64. This excludes most students and all seniors.

Under current law, you cannot receive the childless EITC yourself if you qualify someone else for the credit. Full-time students are often qualifying children, while part-time students are not.  Retaining this rule means full-time students cannot get a childless EITC but getting rid of it means we might be subsidizing a lot of students from upper-middle income families.

One solution would be to lower the age limit to 18 (rather than eliminate it entirely) but keep the qualifying child rule. This could provide a subsidy to part-time student workers as well as young, independent workers without also encouraging them to drop out of high school in favor of work.

At the other end of the age spectrum, should low-income elderly workers benefit from the EITC? Older workers with low enough earnings to qualify for the EITC are at great financial risk during retirement.

The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.

If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.

Steve Holt and I provide a model for reducing marriage penalties by focusing on individual worker earnings, rather than family earnings. This could equalize incentives between primary and secondary earners to work, a move that could help married couples move into the middle class. We propose limiting the worker credits to families with low and moderate joint income, in order to minimize the chances that a low-income worker in a high-income couple would receive the new credit.

Expanding the childless EITC is the right call for policy makers interested in reducing poverty. But policymakers need to answer some tough questions if they are going to get the new policy right.

7Comments

  1. ND  ::  3:10 pm on February 5th, 2014:

    I appreciate the explanation of the marriage penalty issue and how you are trying to address the income splitting problem (which needs to happen at all levels of income, not just for the poor) as well as to avoid subsidizing low-income coparents of high earners.

    Would love to see you take this one step further and make a statement that children, including the unpaid work of their care, is the responsibility of both parents as a baseline or in the default of their not being another express agreement between the parents for meeting the child’s needs, and in a way that meets basic child neglect prevention standards.

    Thus all these programs should be built on this default or baseline assumption, not on the assumption that there is a primary or sole unpaid worker who meets the needs of the child (usually the woman).

  2. Jack Gallagher  ::  4:40 pm on February 5th, 2014:

    Good grief. How about we simply stop trying to effect social change via the tax code? If congress wants to subsidize certain folks, for whatever reason, let them enact a transfer payment scheme directly, and be honest about it, and be accountable for it, rather than slithering in the shadows of refundable tax credits, that are ripe for abuse.

  3. Michael Bindner  ::  2:53 am on February 6th, 2014:

    The original intent of the EITC was both to give money to families and to essentially pay for their Social Security taxes. While raising the incomes of the working poor (and non-working poor) is laudable, it also subsidizes the employers of low wage workers and their customers. Better a higher minimum wage with paid training opportunities to anyone who can’t find a job. Also, consolidating tax credit programs into a single one – say a super (refundable) Child Tax Credit might be more appropriate. As for reimbursing Social Security, it would be better to simply put a floor on the employee contribution so that the poor don’t pay the tax, while decoupling the employer contribution from income and the employee tax entirely – so low wage workers would get a full employer contribution – equal to the CEO and possibly funded by a consumption tax rather than a wage offsett. Raise the consumption tax high enough and the base payment for Seniors and the Disabled can be greatly increased as well. I think this makes sense. Please consider and comment, Elaine and Steve.

  4. Michael Bindner  ::  3:04 am on February 6th, 2014:

    Might I also add that the marriage penalty should simply be gone – though without an EITC for singles. Just give the same paid educational opportunities to anyone who is jobless and needs one – even if their spouse has an income (although the income would be taxable over $150 K).

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