A stronger EITC to grow the middle class

A slowly shrinking middle class has reignited efforts by policymakers to find new pathways to the middle class. To be sure, public education, a fair and competitive labor market, and a vibrant national infrastructure are key components. But one program has stood out for its impact on the well-being of low- and moderate-income families: the Earned Income Tax Credit (EITC).

Since its inception in 1975, the EITC has garnered acclaim from members on both sides of the aisle. At its heart, the EITC is a wage subsidy that substantially raises take-home pay for workers at the lower end of the income scale. For those workers who are on the cusp of poverty — often with unstable incomes and who are hard-pressed to make ends meet — a few thousand extra dollars can make all the difference.

By design, the EITC is especially generous to families with children. At the federal level, the most generous subsidy goes to families with three or more kids; these families can get up to 45 additional cents for every dollar earned and can receive up to $6,431 annually. Families with two kids can receive up to 40 cents on the dollar and a maximum credit of $5,716. The EITC is worth little to childless workers, who only receive a maximum of 7.65 cents on each dollar of wages and can only get a maximum credit of $519. Taxpayers in 29 states are eligible to receive an extra boost due to a state-level credit.

The case for the EITC has been bolstered by a new study by economists Jacob Bastian and Katherine Michelmore. After analyzing four decades of data on the EITC, Bastian and Michelmore found conclusively that the credit improves outcomes down the line for teenagers (aged 13 to 18) whose parents receive the subsidy. Specifically, each $1,000 in credit received boosted high school graduation rates by 1.3 percent, college graduation rates by 4.2 percent, young-adult employment rates by 1.0 percent, and future earnings by 2.2 percent.

Bastian and Michelmore’s study builds on a long history of positive evaluations of the EITC. The credit has been shown time and again to be a powerful work incentive, especially for single parents. It is one of our nation’s most effective anti-poverty programs, lifting 6 million families out of poverty. And, like the Bastian and Michelmore study, researchers have repeatedly found that the EITC helps kids do better in school and eventually earn higher wages in adulthood.

For those workers who are on the cusp of poverty… a few thousand extra dollars can make all the difference.

Yet, despite widespread evidence that it works, an EITC expansion was not included in the Tax Cuts and Jobs Act (TCJA) signed into law in late 2017. The TCJA included $1.5 trillion in various tax cuts — ranging from $1.3 trillion to cut the corporate tax rate to $83 billion in cuts to the estate tax — but unfortunately didn’t expand the EITC at all.

The lack of TCJA support for EITC expansion was not due to lack of good ideas; proposals to strengthen it abound. President Obama endorsed a plan to make the EITC more generous for childless workers. Both Senator Marco Rubio and House Speaker Paul Ryan have backed a more generous credit. And various scholars have put forth proposals in a similar vein. For example, Hilary Hoynes proposed to strengthen the credit for one-child families and, along with Jesse Rothstein and Krista Ruffini, called for a 10 percent across-the-board increase in the credit. The cost of all of these plans would be a drop in the bucket compared to the price of the corporate tax cut.

As the middle-class squeeze continues, lawmakers will seek policy solutions for bolstering opportunity for working families. These need not always be new ideas, but can be expansions of policies with demonstrated success. For four decades, the EITC has proven to be one of the most effective programs at improving the lives of working Americans; sometimes it’s best to go with what works.