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July 15, 2013

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

By Chuck Marr, Krista Ruffini, and Chye-Ching Huang

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 box). But low-income workers not raising minor children 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,1 alleviating poverty, and supplementing low wages.

Key provisions of the Working Families Tax Relief Act of 2013 (S. 836, introduced by Senator

Sherrod Brown and 29 co-sponsors) and the Earned Income Tax Credit Improvement and Simplification Act of 2013 (H.R. 2116, introduced by Rep. Richard Neal and 19 co-sponsors) would substantially strengthen the EITC for childless workers by lowering the eligibility age to 21, phasing in the credit more rapidly so it offsets a poor worker’s payroll taxes fully, and raising the maximum credit to $1,350. 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. We estimate they would lift more than 300,000 childless workers out of poverty and lift at least 3.8 million others closer to the poverty line, using the Census Bureau’s Supplemental Poverty Measure (which includes the cash value of tax credits and benefit programs such as SNAP).

1 For a summary of research on the EITC, see V. Joseph Hotz and John Karl Scholz, “The Earned Income Tax Credit,” in Robert A. Moffitt, ed., Means-Tested Transfer Programs in the United States (Chicago: The University of Chicago Press, 2003) and Bruce Meyer, “The Effects of the Earned Income Tax Credit and Recent Reforms,” in Jeffrey R. Brown, ed., NBER Book Series Tax Policy and the Economy (National Bureau of Economic Research, 2010), http://www.nber.org/chapters/c11973.

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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 $270, or one-tenth the average $2,790 credit for filers with children. In addition, the childless workers’ EITC begins phasing out when earnings exceed $7,970, or just 55 percent of full-time, minimum-wage earnings.

As a result: • A childless adult working full time at the minimum

wage (and earning $14,500) receives no EITC. This worker has a federal income and payroll tax burden of $2,669 in 2013, a large tax burden for someone with income this low.2

• A childless adult with wages equal to the Census Bureau’s poverty line (projected at $11,905 in 2013) faces a federal tax burden of $1,826 (including the employer share of the payroll tax), after receiving an EITC of just $186. Childless workers are the lone group that the federal tax system taxes into, or deeper into, poverty. (See Figure 1.)

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

2 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 $1,109 if only the employee share of the payroll tax is included.

Figure 1 Current Childless Workers’ EITC

Does Little to Offset Income And Payroll Taxes

Source: Internal Revenue Service

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workers will lower unemployment rates and achieve the dual social benefits of reducing incarceration rates and increasing marriage rates.”3

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.4

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.5 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.

3 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/.

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

5 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.

Figure 2 Drop in Labor Force Participation

Greatest Among Young Men

Source: Bureau of Labor and Statistics

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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).6

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.7 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.8

Low Marriage Rates Raising the rewards of work for childless workers also may increase their marriage rates, several

analysts have noted.9 Marriage rates have fallen almost 30 percentage points for the lowest-income men since the 1970s.10 In 1987, William Julius Wilson noted the correlation between falling real wages and declining marriage rates in low-income communities,11 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.12

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

7 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.

8 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.”

9 Scholz; Haskins.

10 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.

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

12 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.

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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.13 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.14

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.)15 Upon release, these individuals typically face inhospitable labor markets.16

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.17 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

13 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.

14 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 1).

15 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.

16 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.

17 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.

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individuals, an expanded childless EITC would also likely reduce crime rates among young, disadvantaged men.18 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.19)

Both the House and Senate bills lower this age floor to 21, but they differ in their treatment of

students. S.836 expands the credit to all childless individuals aged 21-24 with qualifying earnings, while H.R. 2116 extends the credit only to those in this age range who are not students more than half time. There are advantages and drawbacks to each approach. The Senate approach, for example, supports low-income young people who are combining work and school, though it could enable some students from middle-income families who are not claimed as dependents (or as qualifying children for the EITC) on their parent’s income tax return to receive the credit. 20 Either approach represents a substantial improvement in this area.

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. 18 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/.

19 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.

20 Under current law, full-time students between ages 19 and 23 can be claimed by their parents as qualifying children for the EITC for families with children. Students claimed for the EITC under this provision — and students who are claimed as a dependent on their parents’ tax returns — would be ineligible for the EITC for childless workers under both bills.

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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 $6,370. Payroll taxes, in contrast, equal 15.3 percent of a worker’s income (including the employer share), so for childless workers earning up to $6,370, the EITC offsets only half of the additional payroll taxes they owe if they raise their incomes.

This is why S.836, H.R.2116

and a number of previous proposals — including proposals from former Senator John Kerry and Rep. Charles Rangel — 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.

S.836 and H.R.2116 also raise the earnings level at which the credit is fully phased in from $6,370

to $8,820. Together, these two changes raise the size of the maximum credit from $487 (7.65 percent of $6,370) to $1,350 (15.3 percent of $8,820).

In addition, S.836 and H.R.2116 raise the income level at which the credit starts to phase out from

$7,970 to $10,425. 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 S.836 and H.R.2116, the credit would phase down at a 15.3 percent rate, and phase out entirely when income reached $19,245 — 133 percent of full-time earnings at the minimum wage. The current credit phases out at $14,340, which is below full-time minimum-wage earnings.

Combined with a reduction in the eligibility age, these changes would reduce poverty substantially among low-income childless workers. We estimate they would lift more than 300,000 such workers out of poverty, and reduce the severity of poverty for 3.8 million others, using the Census Bureau’s Supplemental Poverty Measure (which includes the cash value of tax credits and benefit programs such as SNAP).21

21 CBPP calculations from Current Population Survey.

Figure 3 Proposal Would Substantially Expand

Childless Workers’ EITC

* Working Families Tax Relief Act of 2013 (S. 836) and Earned Income Tax Credit Improvement and Simplification Act of 2013 (H.R. 2116) Source: Internal Revenue Service

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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 two bills discussed in this analysis, S.836 and H.R.2116, marry improvements in the childless worker credit with measures to make the 2009 EITC improvements permanent. S.836 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 more people (including 800,000 more children) out of poverty in 2011. The EITC and CTC as a whole lifted 9.4 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 (which is 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.