How Senator Murray's new tax plan helps the poor (and how it doesn't)

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Article Highlights

  • Let’s break down the good and the bad of Senator Murray’s 21st Century Worker Tax Cut Act.

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  • The good: Murray's tax cut act addresses the marriage penalty in the EITC head on.

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  • The bad: the act presents the EITC expansion as a complement to an increase in the minimum wage. It should be a substitute.

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Let’s break down the good and the bad of Senator Murray’s 21st Century Worker Tax Cut Act.

The good

The Act addresses the marriage penalty in the EITC head on. As we wrote in our recent study, there are significant marriage penalties in the EITC because credit is based on family income rather than individual income. As a result, married women with children face much higher tax rates than single women with children.

Since two-parent households are highly correlated with upward mobility, the government should be at a minimum neutral to marriage. Economists Holtzblatt and Robelein have concluded that the least expensive option to ease the marriage penalty would be to allow for a second-earner deduction. This would reduce the amount of income subject to a tax for a two-earner family, thus extending and flattening the phase-out  region.

The Act allows for a 20% deduction on a secondary earner’s income during the phase-out region of the EITC. Somewhat strangely, it can only be claimed if the couple has a child 11 years old or younger.

Additionally, the Act expands the EITC for childless workers, a proposal that’s been echoed by many on the left and the right. The US Census Bureau estimates that the earned income tax credit (EITC) lifted 5.4 million people out of poverty in 2010 alone. However, the majority of EITC benefits go to individuals with children, leaving out childless adults, who are among the least served individuals in the current welfare system.

Childless adults are currently eligible for a maximum $500 credit and are not eligible for other support programs such as TANF. The Act expands the payment to childless families to $1,400. For comparison, the White House budget suggested raising it to $1,000.

The bad

The Act presents the EITC expansion as a complement to an increase in the minimum wage. It should be a substitute.

As we have written before, the minimum wage is not only ineffective at targeting the poor, but the job losses outweigh the gains. According to the recent CBO report, the minimum wage would lift 900,000 workers out of poverty. For perspective, that’s less than 2% of the people in poverty. The same report also estimated that 500,000 people would lose their jobs, which is hardly what the country needs, given over 10 million people are already unemployed and cannot find work.

Economists Neumark and Wascher contend that the EITC is a more effective antipoverty program than the minimum wage or welfare. It’s hard to see why Democrats keep advocating it in the face of such clear data.

Additionally, the Act focuses on the marginal tax rates of the EITC, but ignores the high marginal tax rates imposed by the federal governments other anti-poverty programs.

The Congressional Budget Office (CBO) finds that some low-income households could face up to a 100% marginal tax rate because of the phase-out of different benefits, such as the Temporary Assistance for Needy Families (TANF) program, Supplemental Nutrition Assistance Program (SNAP), and Medicaid or Children’s Health Insurance Program. The Affordable Care Act further increases the effective marginal tax rate for individuals and families below 400% of the poverty line.

This should be an opportunity to reform these programs to minimize disincentives for work. Representative Paul Ryan has called for streamlining these programs into a single program to minimize the various welfare cliffs. His budget partner, Senator Murray, should take note.

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