Senior Director of Federal Tax Policy
“Speaker [Paul] Ryan has talked about his interest in tackling poverty,” President Obama noted in his State of the Union speech. “America is about giving everybody willing to work a chance, a hand up, and I’d welcome a serious discussion about strategies we can all support, like expanding tax cuts for low-income workers who don’t have children.”
In fact, President Obama and Speaker Ryan not only agree on this point, but they have nearly identical proposals: expanding the Earned Income Tax Credit (EITC) for childless adults — the one group that the federal tax code taxes into poverty — to make it a more effective work incentive. That’s good news, and policymakers would be wise to follow their lead.
The EITC has long enjoyed bipartisan support because it encourages and rewards the work of low- and moderate-income people. Rigorous research has cemented its pro-work reputation: during the 1990s, EITC expansions did more to raise employment among single mothers with children than either the 1996 welfare reform law or the strong economy, a well-regarded study found.
The EITC, however, largely excludes workers who aren’t raising children and completely excludes them if they’re under age 25. A young man just out of school who’s in an entry-level job gets nothing, and a middle-aged woman with grown kids who works for the minimum wage at the local nursing home gets close to nothing.
President Obama and Speaker Ryan propose to change that — in almost exactly the same way. They would phase in the credit more quickly as a worker’s earnings rise, raise the maximum credit to about $1,000, and lower the eligibility age from 25 to 21.
These changes would make a big difference. Currently, as the chart shows, a childless worker with poverty-level wages filing their taxes now for 2015 would receive an EITC of $172, not nearly enough to offset the $1,188 he or she owes in income tax and the employee share of payroll taxes (to say nothing of the employer share, which economists generally agree ultimately falls on workers in the form of lower wages). The proposals from Obama and Ryan would give that worker an $841 EITC, a major step towards lifting the worker back to the poverty line.
For a childless adult working full time at the minimum wage, the proposals from Obama and Ryan would boost the EITC from just $23 to $542.
All told, the proposals from Obama and Ryan would lift about half a million people out of poverty and make another 10.1 million people less poor, the Treasury estimates. They also would increase the reward to work for people doing important jobs across our economy, as the table shows.
Policymakers found common ground last year to make permanent critical improvements to the EITC and low-income part of the Child Tax Credit that were scheduled to expire in 2017. This year, they should take up President Obama and Speaker Ryan’s proposals and fix the glaring hole in the EITC for childless workers.