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“Freeloader” Charge an Insult to Low-Wage Workers

September 15, 2010 at 9:30 AM

What do you call parents who work at very low-wage jobs to support their families — say, a single mother raising two children and working at a nursing home, or a construction laborer trying to support his wife and children?  Until recently, policymakers have called them welfare-reform success stories:  people who have chosen work over welfare.  Now, however, there is a risk that it is becoming fashionable to call them “freeloaders” for whom the Internal Revenue is a “sugar daddy” dispensing tax benefits.

Here’s the issue:  a significant number of low-wage workers with children qualify for an earned income tax credit (EITC) and a child tax credit whose combined value exceeds what they pay in federal income and payroll taxes.  Some critics are using this fact to argue for cutting the EITC and child credit, both of which received temporary expansions in last year’s Recovery Act.  Those critics need to consider the following realities:

  • The EITC is essential to ensuring that work is better than welfare. Congress created the EITC in 1975 specifically to encourage work:  only working people qualify, and the amount of the credit grows with each additional dollar of wages up to a maximum value.  And it has succeeded.  President Reagan called the large EITC expansion he signed in 1986 “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and the Committee for Economic Development (an organization of 250 corporate executives and university presidents) said in 2000 that “The EITC has become a powerful force in dramatically raising the employment of low-income women in recent years.”
  • Over time, EITC recipients pay much more in federal taxes than they receive in EITC benefits. This is because more than half of them get the credit only for one or two years at a time, such as when their incomes drop due to a temporary layoff.  Taxpayers who claimed the EITC at least once during an 18-year period paid a net $473 billion in federal income tax revenues over that period (in 2006 dollars), according to a 2008 study by Tim Dowd of Congress’s Joint Tax Committee and John B. Horowitz of Ball State University.
  • Low-income workers pay a disproportionate share of state and local taxes. The lowest-income fifth of taxpayers pay 11 percent of their income in state and local taxes, nearly double the rate that the top 1 percent of taxpayers pay.  (Most states rely heavily on sales taxes, which eat up a larger share of the income of lower-income families than of affluent ones.)  The EITC and child credit can help offset this tax burden for many low-income working families.
  • The child tax credit both helps offset the large cost of raising children and encourages work. Congress created the credit in 1997 to help families meet the costs of raising children, and lawmakers expanded it in 2001 and 2009.  The full credit is worth $1,000 per child.  As with the EITC, only working families qualify.The 2009 expansion made the child credit a more effective work incentive by making millions of low-income families eligible for it for the first time and expanding the credit for many other low-wage families who’d only qualified for a small credit under the old rules, such as those headed by a minimum-wage worker.  This change gave unemployed parents a more powerful reason to look for and take offers of even very low-paying or part-time jobs if those are all they can find.
  • Taking money out of low-wage workers’ pockets is the last thing the economy needs now. A family headed by a full-time, minimum-wage worker with two kids will lose nearly $1,500 next year if Congress doesn’t extend the Recovery Act improvement in the child credit.  Since low-income families generally spend all of their income on basics like housing and food, a cut in their income means they’ll spend less.  And less spending, in turn, means fewer jobs and a slower-growing economy.

Low-wage working parents aren’t “freeloaders” sitting home on the couch eating potato chips.  These people are working to make ends meet for their families — on wages that often don’t make that possible.  We should help them succeed.


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