This past spring, a 25-year-old medical assistant in Lufkin, Texas got a huge boost from the federal government at tax time. Juana, a single mother with two small children in elementary school, owed $553 in federal income taxes after earning $25,113 at a physician’s office. She agreed to provide details from her 2011 tax return in return for anonymity.
Not only did Juana get all her withheld taxes back by claiming the regular child tax credit and a retirement tax credit, she received a check for $5,148 from the Treasury, bringing her total income to $30,261. She’s one of about 27 million working adults using the two largest tax benefits the government provides for low-wage workers – the earned income tax credit (EITC) and the child tax credit (CTC), which goes to people whose income isn’t high enough to benefit from the dependents deduction.
“I’m saving most of it for any emergencies, if my kids get sick or I have to be out of work,” she said. “But I used some for home improvements, kitchen cabinets and stuff like that.” Since going to work as a teen-age mom, she’s used tax savings to purchase a small home and earn a post-high school certificate, which allows her to perform important functions like taking patient vital signs in addition to her work at the front desk. She recently received a $1-an-hour raise to $13.50, she said proudly.
Juana is exactly the kind of upwardly mobile low-wage worker the EITC and CTC were designed to help. The EITC, first proposed by President Richard Nixon, was enacted by President Gerald Ford and has been expanded under both Republican and Democratic administrations. President Ronald Reagan called it "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress."
Liberals agreed and have lauded the EITC and CTC tax expenditures as one of the most successful anti-poverty programs for working families of the past half century. A recent Center for Budget and Policy Priorities report said the two credits lifted 9.2 million people, including 4.9 million children, above the poverty line in 2010.
Until recently, they were uncontroversial, even as their expense grew to rival other major tax expenditures like the home mortgage interest deduction or the charitable deduction, which go primarily to upper middle-class and wealthy taxpayers. Mainstream Republicans traditionally pushed the EITC as an alternative to raising the minimum wage while Democrats enthusiastically backed the credits as crucial to “making work pay” for working mothers leaving welfare and for those whose educational attainment and skills will probably leave them near the bottom of the income distribution for most of their working lives.
Yet the programs have become embroiled in controversy this year. Juana is among the 46 percent of American householders that paid no federal income tax last year – a “taker” to use Republican nominee Mitt Romney’s controversial phrasing, since repudiated – even though she paid nearly $1,500 in federal payroll taxes. About two-thirds of tax filers who pay no federal income tax work for a living and pay at least payroll taxes.
Depending on the outcome of the election, it’s possible neither tax break will survive beyond the end of the year. Both the EITC and CTC expire along with a host of expiring business tax breaks and the 2001 and 2003 across-the-board income tax reductions, a part of what is better known as the fiscal cliff. Conservatives are pushing hard to eliminate the special breaks for low-wage workers claiming everyone should be required to pay at least some income taxes. They claim that creates a situation where a large percentage of the population leans toward higher taxes and larger government spending since they are not affected by tax increases.
Think tanks like the Heritage Foundation, which once supported the EITC, have begun issuing periodic broadsides attacking it for redistributing income from the rich to the poor. “Tax day or pay day: how the tax code is expanding government and promoting dependency,” read the headline on a typical Heritage Foundation blog post attacking not just the EITC and CTC, but the education, first-time home buyer, energy efficiency and other tax credits disproportionately used by low-income families.
Some have also pointed to high levels of fraud in the EITC program, since tax returns of the low-wage workers that take the credits are rarely audited by the Internal Revenue Service. The Treasury’s inspector general for tax administration earlier this year estimated that improper payments represented anywhere from 21 percent to 26 percent of claims costing $13.7 billion to $16.7 billion.
“It’s a little puzzling why these tax credits have become a political football,” said Sean Noble, policy director of the National Community Tax Coalition, a coalition of 300 groups across the country that provide volunteer income tax assistance for low-income families. “These were bipartisan success stories because they met both conservative liberal principals.
“For conservatives, it rewards work because a family has to have earned income to qualify,” he said. “And for liberals, it helps people at the lowest rungs of the economic ladder.”
Economists generally agree and have found the EITC and CTC have been particularly helpful for single moms wanting to move into the workforce. The refundable tax credits go a long way toward making sure the value of work while paying for childcare exceeds public assistance. A study by University of Chicago economist Jeffrey Grogger found that the EITC expansions enacted under President Clinton reduced welfare caseloads more than the 1996 reform law, which made it tougher to get on or stay on temporary assistance.
The CBPP study also pointed out that most people who receive the EITC only get it for a year or two and that most recipients pay far more in income taxes over the course of their working lives than they receive in benefits. Another recent study found that children in families getting the EITC and CTC did significantly better in school than those who don’t. Yet about one quarter of families that qualified for the credits fail to apply.
Conservatives economists see downsides in the program, however. Casey B. Mulligan, an economics professor at the University of Chicago, pointed out in The New York Times Economix blog earlier this year, “For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or ‘“phase-out’” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year.”
There have been several proposals to defuse the growing movement among conservatives to eliminate the EITC and CTC. The Rivlin-Domenici deficit reduction plan called for giving everyone a tax credit for working for the first $20,000 of income, which would in effect extend the benefit to everyone but reduce its benefits for those earning between $20,000 and $46,000 a year, the current cut off point for a program that gradually phases out.
Another option for satisfying the critics would be to turn it into a grant. Let low-wage workers pay taxes at their statutory rates and then send them a check. Then it could no longer be said they weren’t paying taxes.
It would be unfair to single out the EITC and CTC for this special treatment, however. Imagine if the government had to send a check to every middle and upper-middle class family that claimed deductions for their home mortgage interest, charitable deductions and retirement savings. Under that scenario, it’s hard to imagine that deficit cutters seeking to limit tax expenditures to help balance the budget would put the EITC and CTC at the top of the list for cutting.