Economic Opportunity: Improving the EITC and CTC

A new research paper from the Tax Policy Center advocates for the simplification and updating of current tax credits that benefit low-income workers and families. The paper, “Considerations in Efforts to Restructure Refundable Work-Based Credits,” by Steve Holt and Elaine Maag, argues that the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), and the new Make Work Pay Credit (MWP) have done a great deal to help low-income individuals and families supplement their income. Despite this success, there is still room for improvement. The authors argue that because these credits operate separately from each other in the tax code and sometimes have different eligibility rules, improving and updating them would make them more effective and help even more people living in poverty.

Holt and Maag propose combining the EITC, CTC, and MWP credits into two simplified credits: the Worker Credit and the Child Credit. The Worker Credit would be available for all non-dependent persons between 18 and 65 years old. The credit would amount to 20 percent of all earnings up to $10,875 (full-time, minimum wage job for 50 weeks) for a maximum credit of $2,175. The credit would begin to phase out at 130 percent of the federal poverty line (FPL) and hit a floor of $400 for middle income earners and drop to $0 for high income earners. Both spouses in a marriage could claim their own Worker Credit.

The Child Credit would apply for all children under age 19 (and totally and permanently disabled adult children). The maximum credit would be $2,350 for one child, $5,250 for two children, and $5,900 for three or more children. The credit amount would also begin to phase out at 130 percent of FPL stopping at $1,000 for each child, while phasing out completely for higher income earners, just like the current CTC.

Both credits would be fully refundable and available from the first dollar of earnings. In other words, there are no minimum income thresholds that must be met to become eligible.

These changes would concentrate benefits of these credits with lower-income and middle-income persons and families, as intended. Also, because the Worker Credit rises as income rises (until the maximum is reached), it serves as an incentive for single individuals with no children to find work. RESULTS advocates for a higher EITC for single workers without children, the elimination of marriage penalties, and a CTC for which all low-income persons are eligible. While RESULTS takes no position on these specific proposals at this time, we applaud the efforts of the Tax Policy Center in highlighting the importance and success of low-income tax credits, and proposing constructive ways to improve on their effectiveness. We urge Congress to make tax reform for low-income persons a priority in 2010. Contact members of Congress about expanding tax credits for the poor to support low-income savings and asset building. Use our