Economy & Budget

Reforming the earned income tax credit could be a bipartisan victory for Trump

Greg Nash
With a healthcare failure under their belt and an upcoming showdown over keeping the government open, the Trump administration is looking to score a legislative win and must garner bipartisan support to do so. As the debate in Washington turns to tax reform, improvements to the earned income tax credit (EITC) is one of the policy options that can help bring together both sides of the aisle.
Many Americans live paycheck-to-paycheck and struggle to make financial ends meet due to low wages, earnings that can change week to week, and an uncertain economic future. The earned income tax credit, created in 1975, is a powerful tool for increasing take-home pay while encouraging work.
To qualify for this tax credit, which grows as one’s income rises until it phases out gradually for moderate- to middle-income families, one must work and prove the receipt of earnings. The credit is also “refundable,” which means that it can exceed one’s federal income tax liability. Many conservatives support the EITC, because it’s clearly a hand-up, not a handout. Many progressives champion the EITC as well, not only because it increases employment but because it helps ameliorate low pay and state and local tax systems that have workers making the least paying the most in proportion to their incomes.
{mosads}The 28 million Americans benefitting from the credit receive $2,500 on average. The EITC lifts approximately 6.5 million people out of poverty — including 3.3 million children — while reducing poverty for 21 million more. At least as important are the long-term educational, health and earnings and employment benefits to adults who benefited from the EITC as kids.
But the number of people benefiting from the EITC could and should be higher.
Because it phases in from the first dollar of earnings each year, the EITC helps anyone who wants to work, work. This means it supports part-time or part-year work among people struggling with disability, illness, caregiving responsibilities, recent job loss or other challenges. Businesses are also generally pro-EITC, because it helps low-wage employees without raising the cost of labor and expands the supply of workers.
Still, the EITC could do much more to help hard-working families. First, it could be provided biweekly or monthly throughout the tax year, instead of as one lump sum during tax filing season, to better help families avoid financial hardship and smooth out consumption.
Second, we could make the credit even more efficient while helping more hard-working individuals and families. An estimated 21 percent of eligible families don’t participate in the EITC, either due to lack of awareness or the complexity of filing for the tax credit. In addition, IRS studies, though potentially overstating the improper payment rate, estimate it to be over 22 percent — and the actual rate is needlessly high, due in significant part to the credit’s complexity.
Eligible workers whose employers use electronic payroll processing should be able to adjust their withholdings at their jobs, collecting the EITC and a greater paycheck each month. Electronic payroll processing would ensure a simpler and more accurate process both for workers and the government. This policy might even result in savings to the government by reducing payment errors and enforcement costs.
Another crucial component is a safe-harbor provision. Imagine a taxpayer who, upon qualifying for the EITC in the first three months of the year, received a partial benefit — and then, in the last nine months of the year, earned a promotion at work and higher pay. Without a safe-harbor provision, the worker’s family would lose out on the EITC for the entire year. A safe harbor would ensure that families aren’t penalized for getting ahead at work, thus improving the effectiveness of the EITC as a pro-work and anti-poverty program. Similar provisions already exist for other tax benefits.
Savings from these changes could be used to maximize the impact of the EITC by expanding its benefits for workers not raising children, including younger workers aged 18 and up, noncustodial parents, and those with older children. This would achieve the long-sought goal of ensuring that the federal government does not tax people into poverty.
While the earned income tax credit is good public policy, it can be strengthened. By working together across the aisle and taking these simple steps, we’ll lift more Americans into the middle class, reduce administrative burdens for the government, incentivize work and put more money back into the pockets of low- and moderate-income Americans who most need it. With tax reform front and center, it’s time to make the EITC even more great!
Jason Fichtner is senior research fellow at the Mercatus Center (@Mercatus) at George Mason University and a former member of the Joint Economic Committee’s Republican Staff. Indivar Dutta-Gupta is co-executive director of the Georgetown Center on Poverty and Inequality and a former member of the U.S. House of Representatives Ways and Means Committee’s Democratic Staff.

The views expressed by contributors are their own and are not the views of The Hill.

Tags earned income tax credit EITC Indivar Dutta-Gupta Jason Fitchner
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