Strengthening the EITC for Childless Workers Would Promote Work and Reduce Poverty

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By Chuck Marr, Chye-Ching Huang, and Nathaniel Frentz[1]

Updated March 20, 2014

Policymakers have made substantial progress in recent years in “making work pay” for low-income families with children by strengthening the Earned Income Tax Credit (EITC) and Child Tax Credit.  (See the box at the end of this paper.)  But low-income childless workers (childless adults or non-custodial parents) receive little or nothing from the EITC; for example, a childless adult working full time at the minimum wage is ineligible, because his earnings exceed the income limit for the very limited credit for workers not raising minor children.  As a result, childless workers are the sole group that the federal tax system taxes deeper into poverty. 

All childless workers under age 25 are ineligible for the EITC, so young people just starting out —including low-income young men, who have disturbingly low labor-force participation rates — receive none of the EITC’s proven benefits, such as promoting work,[2] alleviating poverty, and supplementing low wages.  

The President’s 2015 budget and three congressional proposals (the Working Families Tax Relief Act of 2013, introduced by Senators Sherrod Brown and Richard Durbin; the Earned Income Tax Credit Improvement and Simplification Act of 2013, introduced by Rep. Richard Neal; and the EITC for Childless Workers Act of 2014, introduced by Rep. Charles Rangel) would all substantially strengthen the EITC for childless workers.  All would lower the eligibility age to 21 and raise the maximum credit:  the President’s proposal to about $1,000 in 2015, the Brown-Durbin and Neal bills to about $1,400, and the Rangel bill to about $1,500.  All of the proposals would also phase in the in the credit more rapidly.  

By making more childless workers eligible for the EITC — including those working full time at the minimum wage — and boosting the credit for workers currently eligible, these measures hold strong promise of increasing employment and reducing poverty.  The Treasury Department estimates that the President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for another 10.1 million.[3]  (These estimates use the Census Bureau’s Supplemental Poverty Measure, which includes the cash value of tax credits and benefit programs such as SNAP.)  The congressional proposals to expand of the EITC for childless workers are larger so would likely have a larger anti-poverty effects.

Credit Misses Many Low-Wage Childless Workers

The EITC misses many low-income childless workers entirely and provides only minimal help to many others.  Childless workers under age 25 are ineligible for the credit and the average credit for eligible workers between ages 25 and 64 is only about $270, or less than one-tenth the average $2,900 credit for filers with children.[4]   In addition, the childless workers’ EITC begins phasing out when earnings exceed $8,000, or just 55 percent of full-time, minimum-wage earnings.

As a result:

  • A childless adult with wages equal to the Census Bureau’s poverty line (projected at $12,566 in 2015) will face a federal tax burden in 2015 of $1,978 (including the employer share of the payroll tax), after receiving an EITC of just $171.  Childless workers are the lone group that the federal tax system taxes into, or deeper into, poverty.  (See Figure 1.)
  • A childless adult working full time at the minimum wage (and earning $14,500) will have a federal income and payroll tax burden of $2,617 in 2015 — a large tax burden for someone with income this low — after receiving an EITC of just $22.  

Strengthening Credit Could Bring Social as Well as Economic Benefits

Providing a more adequate EITC to low-income childless workers and lowering the eligibility age would have several important benefits beyond raising these workers’ incomes and helping offset their federal taxes.  Some leading experts believe that an expanded credit would help address some of the challenges that less-educated young people (particularly young African American men) face, including low and falling labor-force participation rates, low marriage rates, and high incarceration rates.

For example, Karl Scholz, an economist and former Treasury official who is one of the nation’s foremost authorities on the EITC, strongly recommends a more ample EITC for childless workers as a way to raise their employment rate, explaining:  “increasing the return to work for childless workers will lower unemployment rates and achieve the dual social benefits of reducing incarceration rates and increasing marriage rates.”[6]  

Likewise, Ron Haskins, co-director of the Brookings Institution’s Center on Children and Families and one of the key architects of the 1996 welfare law, argues that an expanded EITC for childless workers would:

provide the very thing that most analysts agree is most needed — namely, work incentive … [and] the young man’s prospects in the marriage market would receive a nice boost.  Studies show clearly that married young males are healthier, happier, less likely to commit crimes and less likely to abuse drugs than single males.  Thus, to the extent that additional income increases marriage rates, the new EITC would produce fringe benefits beyond mere economic outcomes.[7]

Low and Falling Labor Force Participation

Young men’s attachment to the labor force (measured by the percentage working or actively looking for work) has been declining for over two decades.  Between 1990 and 2007, the labor-force participation rate of men aged 20 to 24 fell by 5.7 percentage points — from 84.4 percent of this population being in the labor force to 78.7 percent — one-and-a-half times the decline among men aged 25 to 54.  Young men’s labor force participation then fell almost twice as much as that of older workers in the Great Recession.[8]   As a result, in 2012, the labor force participation rate among men aged 20 to 24 was 14.2 percentage points lower than among men aged 25 to 54, the largest such gap on record (see Figure 2).  

Labor-force participation is particularly low for men without a college education.  In 2012, fewer than 58 percent of male high-school dropouts over age 25 were in the labor force — a rate 22.5 percentage points below that for men with a college education.

Real incomes have also fallen for less educated men.  Between 1991 and 2011, the median earnings for a male high-school dropout working full-time fell by 10 percent, after adjusting for inflation, from $33,809 to $30,423 (in 2011 dollars).[9]

By raising low-income workers’ after-tax incomes, the EITC increases the rewards of low-wage work.  Although there is little empirical literature on the impact of the childless workers’ EITC on employment rates, careful econometric studies have demonstrated that the expansions in the EITC for families with children during the 1990s raised employment rates markedly among low-skilled single mothers.  University of Chicago economist Jeffrey Grogger found that the EITC expansions during this period were at least as important as the 1996 welfare reforms in increasing employment among single mothers.  In addition, women eligible to benefit the most from the EITC expansions experienced higher wage growth in subsequent years than other, similar women.[10]   Numerous researchers believe these results are robust enough to conclude that substantially expanding the childless workers’ credit would increase labor force participation among low-skilled childless men.[11]

Low Marriage Rates

Raising the rewards of work for childless workers also may increase their marriage rates, several analysts have noted.[12]   Marriage rates have fallen almost 30 percentage points for the lowest-income men since the 1970s.[13]   In 1987, William Julius Wilson noted the correlation between falling real wages and declining marriage rates in low-income communities,[14] arguing that low employment rates and falling wages reduced the “marriageability” of these young men, resulting in an increase in the number of female-headed households.  More recently, a 2009 study found that three-quarters of low-income, unwed survey respondents cited financial concerns as an obstacle to marriage.[15]

Marriage can benefit both children and their parents in several ways.  Two-parent households have lower poverty rates than single-parent households, in part because they can pool their incomes and resources.  Marriage can also promote stability, thereby improving health, and lowering stress among parents and children.  A number of studies find that children living with two parents (excluding high-conflict marriages) tend to fare better than other children on educational, social, and health outcomes, even after controlling for parental characteristics such as age, income, and education.[16]   By rewarding employment among childless individuals (particularly young workers), a more ample childless EITC can lead more of them to work or to work more, thereby boosting not only their current wages but also their employment experience and hence their long-term earning potential.  Greater earnings and higher employment can, in turn, improve the marriage prospects of young, low-income men.[17] 

High Involvement in the Criminal Justice System

The decline in employment among young men is even greater than the labor-force participation figures cited above suggest, since those figures do not include people who are incarcerated.  Young men have disproportionately high incarceration rates.  According to a recent Justice Department report, 18 percent of men between ages 20 and 24 were arrested in 2009.  (Although not everyone who is arrested is imprisoned, incarceration rates are still high:  one in 31 adults will be incarcerated at some point in his or her life.)[18] Upon release, these individuals typically face inhospitable labor markets.[19]

Some evidence suggests that by boosting the incomes of low-wage workers, an expanded EITC could help reduce crime rates.  Although the relationship between wage rates and crime is difficult to disentangle (due to the many factors that affect crime rates), researchers have found that lower wages for less-educated people are associated with higher crime rates.[20]   Based on this relationship, several leading analysts such as Harry Holzer of the Urban Institute and Georgetown University and Karl Scholz of the University of Wisconsin have argued that by increasing the wages of low-skilled individuals, an expanded childless EITC would also likely reduce crime rates among young, disadvantaged men.[21]

How to Strengthen the EITC for Childless Workers

To strengthen the EITC for childless workers, policymakers should lower the eligibility age and expand the maximum credit and the credit’s phase-in rate.

Lower the Eligibility Age

As noted, workers under age 25 are ineligible for the childless workers’ EITC.  Congress set the eligibility age at 25 when establishing the EITC for childless workers in 1993 to avoid giving access to the EITC to college and graduate students from middle-income families, who may currently have very low incomes but depend primarily on their parents for support.  As a result, however, the EITC misses many low-income workers who do not rely on their parents for support, and it thus cannot influence such individuals’ employment decisions at the start of their careers.  (Note:  in 1993, the IRS had no way to identify tax filers who were students; today, it does.[22] )

The President’s proposal and the three congressional bills lower this age floor to 21.  There are small differences in the way that students are treated, but under all four proposals most full-time students would be ineligible for the childless worker EITC.  (Under current law and the proposals, most full-time students under the age of 24 can be claimed on their parents’ tax return as a qualifying child or dependent.)

Raise the Maximum Credit and the Credit’s Phase-in Rate

Historically, policymakers have supported the EITC as a mechanism to offset payroll taxes among low-income workers, supplement low wages, and encourage low-wage workers to enter the labor force.  Policymakers can and should strengthen the EITC’s ability to accomplish these goals among childless workers.[23]

Under current rules, the EITC for childless workers phases in at a rate of 7.65 percent; in other words, a worker receives an EITC of 7.65 cents for each dollar of earnings until the credit is fully phased in at earnings of about $6,600 in 2015.  Payroll taxes, in contrast, equal 15.3 percent of a worker’s income (including the employer share).  So, for childless workers earning up to about $6,600, the EITC offsets onlyhalfof the additional payroll taxes they owe if they raise their incomes. 

This is why the Obama, Brown-Durbin, and Neal proposals (and a number of previous proposals[24] ) would raise the credit’s phase-in rate to 15.3 percent (see Figure 2).  Doing so would fully offset payroll taxes for the lowest-income workers and make the credit a more powerful inducement for people to enter the work force; it also would reduce the extent to which single workers are taxed into, or deeper into, poverty.  

The President’s proposal sets the earnings level at which the credit is fully phased in to about $6,550; together with the increase in the phase-in rate, this results in a maximum credit of about $1,000.[25]  The Brown-Durbin and Neal bills would raise the earnings level at which the credit is fully phased in from $6,600 to $9,100 in 2015, expanding the maximum credit from $503 to about $1,400.  

In addition, the President’s proposal raises the income level at which the credit starts to phase out for a single childless worker from about $8,250 to $11,500 in 2015; in the Brown-Durbin and Neal bills, the credit starts to phase out at $10,750.  Ideally, the credit’s phase-out rate would be set very low to avoid high marginal tax rates.  This would be quite expensive, however, and policymakers should focus budget resources on improving the credit’s phase-in rate and maximum value, since these are the features of the credit most likely to affect an individual’s decision on whether to enter the labor force.  

Under the President’s proposal, the credit would phase out at a 15.3 percent rate and phase out entirely for a single childless worker at an income of about $18,050, which is about 125 percent of full-time earnings at the minimum wage.  Under the Brown-Durbin and Neal proposals, the credit would phase out at a 15.3 percent rate and phase out entirely at an income of $19,850 — 133 percent of full-time earnings at the minimum wage.  The current credit, in contrast, ends at $14,800 in 2015, leaving a full-time, minimum-wage childless worker with an EITC of just $22.

As Figure 4 shows, under the Obama proposal the credit for a childless adult with wages at the poverty line (projected at $12,566 in 2015) would jump from $171 to $841 in 2015.   For a childless adult working full time at the minimum wage (and earning $14,500), the credit would rise from $22 to $542.

The Rangel proposal has a higher phase-in rate (23.15 percent) and higher maximum credit (about $1,500) than the other proposals.  It also begins to phase down at a higher income level ($16,900), at a rate of 23.15 percent, with the result that it phases out entirely when income reaches $23,500, about 166 percent of full-time, minimum-wage earnings.[26]

Combined with a reduction in the eligibility age, these proposals would reduce poverty substantially among low-income childless workers.[27]

The President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for another 10.1 million people, according to Treasury estimates.[28]  Because they expand the EITC by a larger amount than the President’s proposal, the Brown-Durbin, Neal, and Rangel proposals would likely have an even larger anti-poverty effect.

Making the 2009 Improvements Permanent

The improvements in the EITC and Child Tax Credit (CTC) for families with children and married filers that policymakers enacted in 2009 and have since twice extended are scheduled to expire at the end of 2017.  Policymakers should make them permanent.  The President’s budget, the Brown-Durbin bill, and the Neal bill couple improvements in the childless workers’ credit with measures to make the 2009 EITC improvements permanent.  The Obama and Neal proposals would also make the 2009 CTC improvements permanent.

The 2009 EITC improvements reduced marriage penalties (by increasing the amount of income that married couples can earn and remain eligible for the credit) and also expanded the EITC for families with three or more children to reflect their higher living expenses.  The 2009 CTC improvements lowered the minimum earnings required to qualify for the credit.  These changes substantially improved the credits’ anti-poverty effectiveness, lifting 1.5 million people (including 800,000 children) out of poverty in 2012.  The EITC and CTC as a whole lifted 10.1 million people out of poverty that year.

If policymakers allow the 2009 EITC improvements to expire, substantial numbers of low-income married couples will face larger marriage penalties, and many families (particularly those with three or more children) will fall into, or deeper into, poverty.  Citizens for Tax Justice has estimated that about 6.5 million working families, including 15.9 million children, would have lost some or all of their EITC in 2013 if the 2009 EITC improvements had expired.a 

If policymakers allow the CTC improvements to expire, working-poor families will be ineligible for the CTC unless their earnings surpass roughly $14,700, starting in 2018 (the equivalent of $13,400 in 2013).  Thus, a single mother with two children working full time throughout the year at the minimum wage of $7.25, and earning $14,500, will receive a $1,725 child credit in 2018 if the CTC improvements are made permanent but will receive no CTC if the improvement expires.  Failure to extend the CTC improvements also would shrink the credit substantially for low-income families with earnings modestly above the $14,700 threshold.  Citizens for Tax Justice estimates that if the CTC improvements were not in place in 2013, approximately 8.9 million working families — including 16.4 million children — would have lost some or all of their CTC.b

a Citizens for Tax Justice, “The Debate over Tax Cuts: It’s Not Just About the Rich,” July 19, 2012, http://ctj.org/pdf/refundablecredits2012.pdf.
b Ibid.

End notes:

[1] Krista Ruffini co-authored the original version of this paper.

[2] For a summary on research on the EITC, see Chuck Marr, Jimmy Charite, and Chye-Ching Huang, “Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds,” Center on Budget and Policy Priorities, Revised April 9, 2013, http://www.cbpp.org/cms/?fa=view&id=3793

[3] Executive Office of the President and U.S. Treasury Department, “The President’s Proposal to Expand the Earned Income Tax Credit,” March 3, 2014, http://www.whitehouse.gov/sites/default/files/docs/eitc_report_0.pdf.

[4] Internal Revenue Service, Statistics of Income Division, “Table 2.5  Returns with Earned Income Credit, by Size of Adjusted Gross Income, Tax Year 2011,” July 2013, http://www.irs.gov/file_source/pub/irs-soi/11in25ic.xls.

[5] This figure includes the employer and employee shares of the payroll tax.  Economists generally believe that employees ultimately bear the employer share of the tax in the form of lower wages then they would otherwise receive, although this may not be the case for people paid the minimum wage.  This figure is $1,507 if only the employee share of the payroll tax is included.

[6] John Karl Scholz, “Employment-Based Tax Credits for Low-Skilled Workers,” The Hamilton Project, December 2007, http://www.hamiltonproject.org/papers/employment-based_tax_credits_for_low-skilled_workers/.

[7] Ron Haskins, “Young Men Need Incentives,” National Public Radio, August 18, 2006, http://www.npr.org/templates/story/story.php?storyId=5671350.

[8] Increased enrollment in post-secondary education can account for some, but only a modest share, of the decrease in the labor-force participation rate among 20-24 year-olds.

[9] Current Population Survey, Historical Table P-24, “Educational Attainment — Full-Time, Year-Round Workers 25 Years Old and Over by Median Earnings and Sex.”

[10] Jeffrey Grogger, “The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Head Families,” Review of Economics and Statistics, May 2003; Jeffrey Grogger, “Welfare Transitions in the 1990s: the Economy, Welfare Policy, and the EITC,” NBER Working Paper No. 9472, January 2003, http://www.nber.org/papers/w9472.pdf.

[11] See, for example, Peter Edelman et al., “Expanding the EITC to Help More Low-Wage Workers,” Georgetown Center on Poverty, Inequality, and Public Policy, 2009, http://www.urban.org/uploadedpdf/1001341_eitc.pdf; Gordon Berlin, “Transforming the EITC to Reduce Poverty and Inequality,” Pathways Winter 2009, http://www.stanford.edu/group/scspi/_media/pdf/pathways/winter_2009/Berlin.pdf; Scholz, “Employment-Based Tax Credits for Low-Skilled Workers.”

[12] Scholz; Haskins.

[13] Michael Greenstone and Adam Looney, “The Marriage Gap: The Impact of Economic and Technological Change on Marriage Rates,” Brookings Institution, February 3, 2012, http://www.brookings.edu/blogs/jobs/posts/2012/02/03-jobs-greenstone-looney.

[14] William Julius Wilson, The Truly Disadvantaged: The Inner City, the Underclass, and Public Policy (University of Chicago Press, 1987), Chapter 3.

[15] Kathryn Edin and Timothy Nelson, “Why Do Poor Men Have Children? Fertility Intentions Among Low-Income Unmarried US Fathers,” The ANNALS of the American Academy of Political and Social Science, July 2009, Vol. 624, No. 1, pp. 99-117.

[16] For a synthesis of the literature, see Susan L. Brown, “Marriage and Child Well-Being: Research and Policy Perspectives,” Journal of Marriage and the Family, October 1, 2010 pp. 1059-1077, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3091824/; Mary Parke, “Are Married Parents Really Better for Children? What Research Says About the Effects of Family Structure on Child Well-Being,” Center for Law and Social Policy, May 2003.

[17] If the childless workers’ EITC is expanded, some unmarried couples could face higher marriage penalties in the form of a smaller EITC if they marry, but policymakers can mitigate this concern by extending the EITC marriage-penalty relief provision enacted in 2009 and extended twice since then.  This EITC marriage-penalty relief provision currently runs through 2017 and should be made permanent.  (See box.) 

[18] Howard N. Snyder, “Arrest in the United States, 1980-2009,” Bureau of Justice Statistics, Department of Justice, September 22, 2011, http://www.bjs.gov/content/pub/pdf/aus8009.pdf; Pew Charitable Trusts, “One in 31,” 2009, http://www.pewstates.org/research/reports/one-in-31-85899371887.

[19] Harry J. Holzer, “Collateral Costs: The Effects of Incarceration on the Employment and Earnings of Young Workers,” IZA Discussion Paper No. 3118, 2007, http://ftp.iza.org/dp3118.pdf.

[20] For a discussion of recent research and estimation issues, see David Mustard, “How Do Labor Markets Affect Crime? New Evidence on an Old Puzzle,” IZA Discussion Paper 4856, March 2010, http://ftp.iza.org/dp4856.pdf.

[21] Holzer, “Collateral Costs: The Effects of Incarceration on the Employment and Earnings of Young Workers,” IZA Discussion Paper No. 3118, 2007, http://ftp.iza.org/dp3118.pdf;  John Karl Scholz, “Employment-Based Tax Credits for Low-Skilled Workers,” The Hamilton Project, December 2007, http://www.hamiltonproject.org/papers/employment-based_tax_credits_for_low-skilled_workers/.

[22] In 1993, the IRS had no ready way to identify tax filers who were students.  This changed in 1998, however, when the IRS introduced Form 1098-T to allow taxpayers and the IRS to verify eligibility for the Hope Scholarship and Lifetime Learning credits.  Currently, the 1098-T identifies individuals who are students at least half time.  This form could be used by the IRS to identify students ineligible for the EITC as long as the form and the eligibility restriction were aligned.

[23] The current congressional proposals to expand the childless workers’ EITC are the Working Families Tax Relief Act of 2013 (S. 836, introduced by Senators Sherrod Brown, Richard Durbin, and 31 other cosponsors); the Earned Income Tax Credit Improvement and Simplification Act of 2013 (H.R. 2116, introduced by Rep. Richard Neal and 48 cosponsors); and the EITC for Childless Workers Act of 2014 (H.R. 4117, introduced by Rep. Charles Rangel).

[24] Aviva Aron-Dine and Arloc Sherman, “Ways and Means Committee Chairman Charles Rangel’s Proposed Expansion of the EITC for Childless Workers An Important Step to Make Work Pay,” Center on Budget and Policy Priorities, October 25, 2007, http://www.cbpp.org/cms/index.cfm?fa=view&id=773.

[25] The Brown-Durbin and Neal bills would expand the childless workers’ EITC starting in tax year 2014, but to make them comparable to the President’s proposal, which would take effect for tax year 2015, all dollar amounts are estimates for 2015. 

[26] The bill also increases marriage penalty relief above current law levels for married filers with and without children.

[27] All estimates use the Census Bureau’s Supplemental Poverty Measure (which includes the cash value of tax credits and benefit programs such as SNAP).

[28] Executive Office of the President and U.S. Treasury Department, “The President’s Proposal to Expand the Earned Income Tax Credit,” March 3, 2014, http://www.whitehouse.gov/sites/default/files/docs/eitc_report_0.pdf.

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