By: Daniel McCracken
Over the last several years, Americans have been paying more attention to the growing problems of poverty and income inequality. However, there is broad disagreement across the political spectrum about how to address them. Among Democrats, popular positions include expanding social programs (funded by raising taxes on wealth or capital gains) and raising the minimum wage. Republicans instead tend to focus on policies that would spur economic growth and fight poverty and inequality indirectly, and usually oppose any increase in tax rates or to the minimum wage.
However, one of our most effective tools to fight poverty and inequality enjoys surprisingly bipartisan support. It was introduced by Gerald Ford in 1975, and expanded by President Reagan and President Clinton. Paul Ryan, Barack Obama, the right-wing American Enterprise Institute, and the left-wing Brookings Institution all support further expanding it. It’s called the Earned Income Tax Credit, and it’s a policy that Americans should be paying more attention to.
The Earned Income Tax Credit (EITC) is a tax credit given each year to low and middle-income workers. Families are eligible when their income is below around $39,000-$53,300 (depending on their marital status and the number of dependent children) and they receive an average of $3000. Childless individuals and families receive a much smaller credit, an average of $281. Conservatives prefer this policy to other social programs because it’s designed to encourage work—the value of the credit grows as workers earn more money and work more hours. And unlike expanding the minimum wage, expanding the EITC increases the income of low-wage workers without increasing unemployment.
Its effects have been almost indisputably positive. The Census Bureau estimates that the EITC (and the similar Child Tax Credit) kept more than 9 million Americans out of poverty in 2013. And a recent study by two Berkeley economists found that this estimate may actually be too conservative. Because the EITC encourages single parents to enter the workforce (which boosts their income on top of the tax credit), the EITC may have actually been responsible for keeping closer to 20 million people out of poverty.
Republicans and Democrats have similar ideas for how to expand the program. Paul Ryan’s proposal would concentrate benefits on lower-income workers by changing the benefit structure, double the maximum credit for childless individuals, and decrease the minimum age for claiming the credit. This is almost identical to the changes President Obama proposed in his 2015 budget, though other Democrats (like Senator Patty Murray) propose larger expansions.
Where Republicans and Democrats disagree is on how to fund the expansion. President Obama’s plan would be funded by closing tax loopholes, such as the carried interest loophole, which hedge fund managers use to pay lower capital gains taxes. Representative Ryan instead proposes cuts to a number of social programs he deems ineffective, such as the Social Service Block Grant and the Fresh Fruits and Vegetables Program. These disagreements are the biggest reason that the EITC already hasn’t been expanded, despite its bipartisan support.
But whether the expansion is funded by cutting spending or raising revenue, members of both parties agree that it’s a good idea. That bipartisan support makes the EITC unique as a poverty-reducing tool, and it’s more likely that some compromise can be eventually reached on this idea than on other, more controversial policies; supporting the EITC doesn’t force anyone to take a position on other poverty-fighting tools (like the minimum wage or social programs). The EITC is one of our most effective tools to reduce poverty and inequality, and support for its expansion should transcend party affiliation.