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A Bipartisan Proposal to Expand the Earned Income Tax Credit

You can view our tax report here: How to Sensibly and Permanently Expand the Child Tax Credit and Earned Income Tax Credit.

 

The Earned Income Tax Credit (EITC) is one of the federal government’s most effective poverty-reduction programs. The credit, however, delivers almost no help to workers without children, and it disadvantages workers with only one child relative to those with multiple children. The Bipartisan Policy Center (BPC) has created a bipartisan package of reforms to implement in 2022 that address these flaws.

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What is the EITC, and why does it need reform?

The EITC raises the after-tax income of workers with low earnings. The credit phases in with a worker’s earnings, plateaus, then phases out at higher incomes. Workers with more children see their credit phase in faster, can receive a larger maximum credit, and remain eligible for the credit at somewhat higher income levels. The EITC can significantly raise a worker’s after-tax income—in 2020, it paid recipients an average of $2,461—and also lifts more than 5 million people out of poverty every year. By supplementing wages, the EITC encourages people with low incomes to participate in the labor force and incentivizes them to increase their earnings.

While the EITC greatly benefits parents, it has historically offered little help to low- and moderate-income workers who cannot claim child dependents. Additionally, workers with only one child receive a maximum credit that is not proportional to their needs or how the program treats workers with two or more children.

BPC’s Recommendations

  • Double the maximum credit and phase-in rate for childless adults and expand the income eligibility range.
  • Lower the minimum eligibility age for the childless EITC to 19, excluding full-time students.
  • Increase the maximum eligibility age for the childless EITC to 66 and link it to the Social Security Full Retirement Age (FRA).
  • Raise the maximum credit for workers with one child to $5,248 and accelerate the phase-out rate to match the rate applied for two-child families.

In 2031—when paired with our recommendations to improve the Child Tax Credit (CTC)—BPC’s proposal will:

  • Reduce the number of Americans in poverty by 4.1 million, reduce the number of children in poverty by 2.3 million, and reduce the number of children in deep poverty by more than 800,000.
  • Increase the labor supply by 0.3% among the poorest 20% of households.
  • Improve the cost-effectiveness of these poverty-reducing credits, as measured by the number of children and adults lifted from poverty per federal dollar.

BPC’s proposal produces a more optimal combination of poverty reduction, work incentives, and overall cost than other proposals, such as a permanent extension of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) or the American Rescue Plan of 2021 (ARP) that temporarily modified the CTC or EITC. Over the next 10 years, TCJA extension would cost $495 billion, ARP extension would cost $1.66 trillion, and BPC’s proposal would cost $1 trillion.

Comparing BPC’s Proposal to Permanent Law (2022)

 Worker with No Children Worker with One Child
Permanent LawBPC’s ProposalPermanent LawBPC’s Proposal
Phase-in rate (from $0) 7.65%15.3%34%34%
Phase-in end (1)$7,330$7,330$10,990$15,430
Maximum credit (1)$561$1,122$3,737 $5,248
Phaseout rate 7.65% 7.65%15.98% 21.06%
Phaseout start (1),(2)$9,170$12,830$20,160$20,160
Phaseout end (1),(2)$16,507$27,489$43,549$45,082
Minimum eligibility age 25 19, excluding full-time students----
Maximum eligibility age 64 66----

1 Values rise each year with inflation.
2 Values shown are for single filers. Credit phases out at higher levels of income for married filers.
Source: Permanent-law parameters are based on 2021 parameters (prior to the enactment of the ARP) from the Tax Policy Center and are adjusted for inflation.

Double the maximum childless credit and phase-in rate and expand the income eligibility range

In tax year 2020, childless workers could receive a maximum credit of $538, compared to $3,584 for a worker with one child and more than $5,000 for workers with multiple children. Considered as a safety-net program to raise low-income workers’ standard of living and incentivize work, the childless credit is too small to make much difference. In addition, recipients are offered little incentive to work or earn more because their EITC phases out so quickly.

BPC recommends doubling the permanent law maximum credit for childless workers to $1,122, doubling its phase-in rate to 15.3%, and raising the income level at which the credit starts to phase out from $9,170 to $12,830 for unmarried filers.

Lower the minimum eligibility age for the childless EITC to 19, excluding full-time students

Workers with children can claim the EITC at any age, but under permanent law, childless adults must be at least 25 years old. The early years of one’s career are a critical time for building skills and attachment to the labor force: 66% of lifetime wage growth occurs during the first 10 years of an individual’s working life.

We propose lowering the minimum eligibility age for childless workers to 19—with the IRS identifying full-time students and excluding them from the credit—to make work pay during these formative years.

Raise the maximum eligibility age for the childless EITC to 66

With the exception of its temporary ARP extension in 2021, the childless EITC’s maximum eligibility age of 64 has been in place since the program’s enactment in 1993. Today, however, older Americans are increasingly likely to work, causing the EITC to exclude a steadily growing share of the workforce.

To permanently address these concerns, we recommend raising the maximum eligibility age to 66 to align the EITC with Social Security’s FRA. Permanently extending the EITC to older workers will enhance their retirement security by encouraging them to stay in the workforce longer, build savings, and help them afford to delay claiming Social Security.

Raise the maximum credit for workers with one child to $5,248 in 2022 and accelerate the phase-out rate to match the rate applied for two-child families

The amount a family can receive from the EITC should be proportional to its needs. Household expenses of two-child families are on average 19% greater than one-child families, but the former are eligible for an EITC that is 65% greater. By contrast, the change in the maximum EITC between two- and three-child families almost exactly matches their relative expenses.

We propose increasing the maximum EITC for workers with one child to $5,248 to make families’ maximum credits proportional to their needs. To ensure that the one-child credit fully phases out before the two-child credit does, we also suggest marginally increasing the one-child phase-out rate to match the rate used for two-child families.

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