To alleviate poverty, make work pay, and help low-wage workers and lower-income families meet rising costs of living, the federal government should expand the Earned Income Tax Credit (EITC).
Targeted expansions to the credit, and new options for workers to receive the EITC’s proceeds throughout the year (rather than in a lump sum), would ensure more economically inclusive growth, especially in the major metropolitan areas where the bulk of America’s working poor resides.
Even as the U.S. economy was growing strongly in recent years, median household incomes and average hourly wages stagnated. Today, about onequarter of the nation’s workforce is employed in low-wage jobs, and low-wage occupations are projected to account for 30 percent of U.S. job growth in the coming years. Meanwhile, prices for necessities such as housing, transportation, and child care have continued to rise for lower-income workers and families. Slowing economic growth, and a potential recession, place additional, immediate pressures on the nation’s less-skilled, lower-wage workforce.
Limitations of Existing Federal Policy
Because it reduces poverty and inequality while promoting work, the EITC is widely acknowledged as one of the singular successes of American social policy in recent decades. Yet the EITC could do more for certain workers and families to help make work pay and to close the growing gap between stagnant wages and rising prices. Moreover the annual lump sum in which nearly all EITC is delivered is not well-timed to help low-income families meet their year-round needs.
A New Federal Approach
The federal government should expand and modernize the EITC, and in doing so help an estimated 8.4 million tax filers in the nation’s 100 largest metropolitan areas, and 14.5 million nationwide, by:
- Tripling the maximum EITC for low-income, childless workers to about $1,300 in tax year 2008, boosting the financial return to work and ensuring that the federal government does not tax these workers into deeper poverty
- Allowing married couples to exclude one-half of a second earner’s income when calculating the EITC, thus reducing economic disincentives for low-income couples to marry and for spouses to join the labor force
- Expanding the EITC for working families with three or more children; these families are twice as likely as smaller families to have low incomes, but they receive no incremental assistance under the current EITC
- Creating a new, streamlined periodic payment option that would provide eligible tax filers with a portion of the credit’s proceeds directly from the IRS throughout the year, as other countries with similar tax credits do
Metro Raise supporting material (appendix tables) »
Metro Raise One-Page Profiles for 100 Largest Metro Areas »
Steve Holt: Periodic Payment of the EITC »
Technical Appendix: Building The Metrotax Model »