In hyper-partisan Washington, the Earned Income Tax Credit has something of a “Mom and apple pie” aura around it. Republicans and Democrats alike generally approve of the program, which aims to reduce poverty and create incentives to work by refunding tax payments to low-income workers.
Late Monday, the Obama administration revealed a plan to expand the EITC as part of its 2015 budget proposal, making it more generous and increasing the number of workers eligible to receive it. According to administration estimates, the proposal would add or increase benefits for 13.5 million low-income workers.
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While the Obama administration’s budget was hammered by Republicans after its release on Tuesday, the EITC expansion may be a rare opportunity for cooperation between the two parties.
In a broad-ranging critique of the social safety net published Monday, House Budget Committee Chairman Paul Ryan found that the EITC “is an effective tool for encouraging and rewarding work among lower-income individuals, particularly single mothers. In theory, the program creates a legitimate incentive to move from welfare to work—which should produce a decline in the number of families dependent on cash-welfare benefits.”
Interestingly, the administration proposes to pay for the expansion – estimated to cost $60 billion annually – by implementing a pair of tax reforms proposed last week by House Ways and Means Committee Chairman Dave Camp (R-MI).
The proposal would expand access, in part, by changing the age at which people are eligible to receive the EITC. Currently, workers under 25 years of age and over 65 are not eligible to receive the benefit. The proposal would reduce the lower limit to age 21 and increase the upper limit to 67, thereby making 5.8 million workers eligible for the credit.
The administration’s plan would also double the maximum credit allowed to childless single workers to $1,000 and increase the income level at which the credit phases out to about $18,000 per year.
The proposal would also increase benefits for 7.7 million workers already receiving the credit. In sum, the administration expects that the proposal would lift about 500,000 people out of poverty, and would reduce the severity of the poverty faced by another 10 million.
“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,” wrote Chuck Marr, Chye-Ching Huang, and Nathaniel Frentz of the Center on Budget and Policy Priorities.
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The administration proposes to pay for the extension in part by eliminating a loophole in the tax code that allows hedge fund and private equity fund managers to pay a lower rate on what’s known as “carried interest” income than they would pay if their compensation was treated as regular earned income.
The remainder of the cost, the administration claims, would be covered by closing a loophole that allows some self-employed individuals, typically professional services providers, to avoid paying self-employment payroll taxes.
Both loopholes were targeted in a tax reform proposal released last week by Rep. Camp.
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