Childless Adults Are Lone Group Taxed Into Poverty
Expanding Earned Income Tax Credit Would Address Problem
April 19, 2016
Federal income tax parameters are generally designed to ensure that federal income and payroll taxes don’t tax people into — or deeper into — poverty. The glaring exception to this principle is low-income childless adults, about 7.5 million of whom are taxed into or deeper into poverty by federal taxes. The main reason is that they are largely excluded from the Earned Income Tax Credit (EITC), which is too small (or, for many, non-existent) to offset their income taxes and the employee share of payroll taxes.
President Obama and House Speaker Paul Ryan (R-WI) have nearly identical proposals that would take a significant step towards addressing this problem. A more robust proposal advanced by Senator Sherrod Brown (D-OH) and a very similar proposal by Rep. Richard Neal (D-MA) would essentially ensure that the federal tax code doesn’t tax childless wage-earners aged 21 through 64 into poverty. A companion CBPP analysis examines the impact of these proposal in more depth.
Poverty-Level Childless Worker Owes Roughly $1,000 in Federal Taxes
The standard deduction and personal exemption are set at levels to ensure that families with children (as well as low-income seniors who receive most of their income from Social Security) don’t start owing income tax until their earnings exceed the poverty line. Also, working-poor families with children can qualify for an EITC and Child Tax Credit that together offset their substantial payroll tax liability and supplement their earnings.
Single childless adults begin owing income taxes below the poverty line and receive little or no EITC.Single childless adults, in contrast, begin owing income taxes below the poverty line and receive little or no EITC. They also face significant payroll taxes. Hence, the federal tax code taxes about 7.5 million people in this group into or deeper into poverty.
Consider, for example, a 25-year-old single woman who makes poverty-line wages in 2016 ($12,494) working as a retail salesperson approximately 35 hours a week, year-round at the federal minimum wage:
- She will have $956 (7.65 percent of her earnings) in Social Security and Medicare payroll taxes deducted from her paychecks.
- When filing her tax return, she will claim a $6,300 standard deduction and one personal exemption of $4,050 for a combined $10,350. Subtracting this amount from her income leaves $2,144 in taxable income. She is in the 10 percent bracket so will have a $214 income tax liability.
- The sum of her $214 in income tax liability and $956 in payroll taxes is $1,170.
- She will be eligible for a small $184 EITC.
- Her net federal tax liability will be $1,170 minus $184, or $986.
In short, federal taxes will drive this woman making poverty-level wages $986 into poverty (see Figure 1).
Fortunately, there is bipartisan momentum to address this policy failure. President Obama and Speaker Ryan have advanced nearly identical proposals to expand the very small EITC for childless adults. Senator Sherrod Brown and Rep. Richard Neal have proposed a somewhat larger expansion. The proposals have the following common elements (see Table 1 for details):
- Lowering the eligibility age. Workers under age 25 are now ineligible for the childless workers’ EITC. All of these proposals lower the eligibility age to 21.
- Increasing the phase-in rate. 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 additional 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, which economists generally agree employers pass on to workers in the form of lower earnings). The Obama, Ryan, Brown, and Neal proposals all raise the credit’s phase-in rate, as well as its phase-out rate at higher incomes, to 15.3 percent.
- Boosting the maximum credit. The maximum EITC for childless adults today is roughly $500. The average credit is only about $280. The Obama and Ryan proposals raise the maximum credit to about $1,000 by increasing the credit’s phase-in rate. The Brown and Neal proposals raise the maximum EITC to roughly $1,400 by increasing both the phase-in rate and the income level at which the phase-in ends, from $6,610 to $9,390.
- Expanding eligibility to include more low-wage childless adults. The current EITC for single childless adults phases out entirely at income of $14,880. Thus, a single childless adult working full time at the federal minimum wage receives essentially no EITC. All of the proposals would raise the income levels at which the EITC begins phasing out and disappears completely.
|EITC Parameters for Childless Adults in 2016: Current Law and Proposed Changes|
|Current law||Obama, Ryan proposals||Brown, Neal proposals|
|Income at which credit stops phasing in||$6,610||$6,610||$9,390|
|Income at which credit starts phasing out (single filer)||$8,270||$11,550||$11,100|
|Income at which credit starts phasing out (married filers)||$13,820||$17,090||$16,640|
|Income at which credit phases out completely (single filer)||$14,880||$18,160||$20,490|
|Income at which credit phases out completely (married filers)||$20,430||$23,700||$26,030|
The retail salesperson with poverty-line wages in the example above would receive an EITC of $870 in 2016 under the Obama and Ryan proposals, a large increase from her $184 EITC under current law. This would offset a much larger share of her $1,170 federal tax liability, though federal taxes would still push her $300 into poverty.
Under the Obama and Ryan proposals, the EITC would offset a childless adult’s income taxes and the employee share of payroll taxes up to incomes of around $11,500. Childless adults at modestly higher income levels, however — like the salesperson in our example — would still be pushed into (or deeper into) poverty.
The Brown and Neal proposals go a step further to essentially ensure that the federal tax code doesn’t tax childless wage-earners aged 21 through 64 into poverty. They would give the salesperson in our example an EITC of $1,226, slightly more than offsetting her $1,170 federal tax liability. Nearly all of the childless adults now pushed into or deeper into poverty by federal taxes would no longer be under the Brown and Neal proposals. (See Figure 2.)
While expanding the EITC would mark important progress for low-wage workers, it’s important to note that regressive state taxes could still push low-wage workers into poverty. State policymakers should act as well, by raising the income levels at which state income taxes kick in and/or by creating or expanding state EITCs.
The principle that we shouldn’t tax people into poverty resonates across the political spectrum. Low-income childless adults are the lone group that the federal tax code fails on this principle. President Obama and Speaker Ryan both have called for addressing this issue, and the Brown and Neal proposals show how policymakers could essentially accomplish it. These developments signal an opportunity for a significant anti-poverty advance in 2016, and Congress and the President should seize it.
 “Childless adults” refers to workers, including non-custodial parents, not claiming dependents for purposes of the EITC.
 Chuck Marr et al., “Strengthening the EITC for Childless Workers Would Promote Work and Reduce Poverty,” Center on Budget and Policy Priorities, April 11, 2016, http://www.cbpp.org/research/federal-tax/strengthening-the-eitc-for-childless-workers-would-promote-work-and-reduce.
 CBPP analysis of the March 2015 Current Population Survey, using Census Bureau-estimated taxes. The estimate includes all workers who: 1) do not have a qualifying child for the EITC; 2) are not a tax dependent themselves; and 3) owe federal income tax plus the employee share of the payroll tax that push them below the poverty line or are already poor (based on their cash income before income and payroll taxes) but are pushed further into poverty by those taxes. It includes workers who are (or whose spouses are) aged 21 through 66. The calculation starts with the combined cash income of a worker and his or her spouse, which includes pre-tax market income as well as government cash benefits (including, for example, Social Security retirement and disability benefits and Supplemental Security Income), and then considers the effect of subtracting (or not subtracting) federal income taxes and the employee share of payroll taxes. (Note that these estimates do not include housing assistance and SNAP, but adding a per capita share of housing assistance and SNAP benefits for workers or spouses who receive these benefits does not materially affect the estimate.) This method refines the methodology based on a modified measure of tax filing unit adjusted gross income used in a previous version of this paper.
 Congress set the eligibility age at 25 when establishing the EITC for childless workers in 1993 to avoid providing access to the EITC to college and graduate students from middle-income families who may have low incomes but depend primarily on their parents for support. In 1993, the IRS had no way to identify tax filers who were students. Today, it does. Because the EITC isn’t available to childless workers under 25, it currently misses many young low-income workers who do not rely on their parents for support, and it thus can’t influence these individuals’ employment decisions at the start of their careers.
The Obama, Ryan, Brown, and Neal proposals lower the age floor to 21. (The Obama proposal also raises the maximum age for receiving the EITC from 64 to 66.) There are small differences in how the various proposals treat students, but under all proposals, most full-time students would be ineligible for the childless workers’ EITC.
 The Brown and Neal proposals use the same general parameters but a different base year for inflation, causing a small discrepancy. We use the Brown inflation adjustment throughout because that bill was introduced more recently.
 The Brown-Neal proposal would not prevent a small number of childless workers aged 21-64 from being taxed into or deeper into poverty. The large majority of these people consists of: 1) full-time students, who generally would not be eligible under the Brown-Neal, Obama, and Ryan proposals; and 2) a small number of childless workers who are self-employed, who could still be affected this way because of the burden of the employer share (as well as the employee share) of payroll taxes. Overall, of the childless workers aged 21-64 who are currently taxed into, or deeper into, poverty, some 92 percent would no longer be under the Brown-Neal proposal. In addition, note that the proposal does not affect younger (below 21) or older (65-66) taxpayers.
 Twenty-six states and the District of Columbia have state EITCs.