Poverty, Equitable Taxation, and the Earned Income Tax Credit

Along with his proposal to raise the minimum wage, President Obama is trying to tackle poverty with a broad expansion of the Earned Income Tax Credit (EITC).

The EITC program essentially gives those earning around and below the federal poverty line ($12,566 a year) a tax credit when they file their taxes. In 2012, it helped lift 6.5 million Americans, including 3.3 million children, out of poverty.

President Obama is currently proposing a $60 Billion expansion of the tax credit’s benefits over 10 years. The program’s expansion will in part help to provide greater benefits to childless workers. Currently, the average childless worker in the program receives $300 a year, while the average family with children in the program receives $3,000. Counting all available tax credits, the federal tax system currently reduces the poverty rate of non-elderly workers with children by 3.7%, while it actually¬†increases the poverty rate of childless workers by 1.4%. So, under the new proposal, a childless worker at the poverty line will see his or her tax credit jump dramatically from $171 to $841 a year. And for a childless worker working full-time for minimum wage ($14,500 a year), benefits will increase from a meager $22 to $542.

And for those worried about the federal deficit, the proposed expansion is actually budget-neutral. It will be paid for by closing tax loopholes that primarily benefit the wealthy. Specifically, it will close the loophole that allows investment fund managers to count their income as carried interest, taxed at the long-term capital gains tax rate, which happens to be far lower than the tax rate most middle-income Americans pay.

All in all, the proposal should help reduce our staggering income and wealth inequality by addressing both ends of the spectrum. Of course this will by no means completely fix the problem of inequality, or the federal tax code, but it is nevertheless a policy that seems to be pointed in the right direction.

For those interested:

The full details of the President’s proposal can be found here.

Also, a study linking the EITC with greater college participation rates among low-income children can be found here.

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