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Tax Reform Could Help The Working Class. Republicans Don’t Seem Interested.

August 23, 2017
In The News

Republicans have said a lot about how they want to reform the tax code this year ― repealing taxes on large inheritances, cutting the number of tax brackets, and reducing tax rates for businesses.

But they haven’t said a thing about what they want to do with a tax break for working-class Americans that, as of 2015, reached more than 28 million low-income households: the Earned Income Tax Credit, or EITC. Unlike tax breaks that reduce the amount of taxes a person owes, the EITC actually gives people money directly.

Republicans and Democrats have repeatedly expanded this credit on a bipartisan basis since it was first created in 1975. Conceived as a ”work bonus,” the measure served as an alternative to proposals to that would have given poor families a guaranteed income. It was supposed to be temporary, but Congress has gradually increased the value of the benefits through a half-dozen pieces of legislation since then.

“Almost always, when tax reform happens, there’s some piece thrown in for low-income families,” said Elaine Maag, a senior research associate at the Urban Institute.  

But this time seems different, so far. When HuffPost asked House Speaker Paul Ryan’s (R-Wis.) office how the EITC may factor into current tax reform proposals, press aides referred questions to the House Ways and Means Committee, the panel traditionally responsible for writing tax legislation. Committee Chairman Kevin Brady (R-Texas) favors maintaining ― but apparently not expanding ― the policy, according to a spokeswoman.

“Chairman Brady supports maintaining the EITC and ensuring that it is working effectively and efficiently,” Ways and Means spokeswoman Emily Schillinger said in an email.

Chuck Marr, a tax policy expert at the liberal Center on Budget and Policy Priorities, pointed out that decades of wage stagnation became a dominant theme of the 2016 presidential election. Marr said it was surprising that working-class woes have been absent from the tax discussion in Congress so far.

“They’re moving around lots of money, and for working-class people the EITC is one of the most ― if not the most ― important part of the tax code,” Marr said. “It’s also the main vehicle in the tax code to subsidize wages. It works. It’s been around for decades. There’s extensive research about how it helps encourage work.”

The EITC originally gave low-income workers a 10 percent credit for their first $4,000 of income, with that credit diminishing as earnings rose beyond that level. Congress has since boosted the maximum benefit amount and raised the cap on earnings that are counted toward the credit, especially for people with children.

A single parent with three kids who earns between $14,000 and $18,000 per year, for example, can now get as much as $6,318 back after filing a tax return. Since low-income workers tend not to have much tax liability, the vast majority receive the benefit as a check in the mail after they file their taxes.

The IRS dished out $58 billion worth of EITC checks in 2015, making the policy comparable in size to the Supplemental Nutrition Assistance Program, which is the second-biggest federal safety net measure after Medicaid.

The EITC lifted more than 6 million people above the poverty line in 2015, according to the Center on Budget and Policy Priorities.

It’s a little surprising that Ryan hasn’t embraced expanding the EITC, because he has done so in previous years. He’s made alleviation of poverty a core part of his agenda and personal brand, proposing in 2014 to expand the EITC so that it would reach more people who don’t have children. (The benefit currently maxes out at just $510 for a childless tax filer.) Expanding the credit was a rare area of agreement between Ryan and President Barack Obama, but it didn’t happen.  

The EITC may be losing its aura of bipartisanship, however, thanks partly to a high rate of improper payments ― or fraud, as conservatives are more likely to call it. More than 23 percent of benefits paid in 2015 went to people who weren’t eligible for the amount they received, according to the IRS ― an error rate much higher than for other safety net programs. The policy’s defenders attribute the error rate to the complexity of the tax code and honest mistakes by people claiming the credit. A person can misreport income, for example, or separated parents might mistakenly both file their own EITC claims.

“There’s been a growing conservative concern about the amount of fraud in the program,” Robert Rector, a welfare expert with the conservative Heritage Foundation, said in an interview. “I wouldn’t see the program expanded until the fraud issues are dealt with.”

Congress approved a measure to reduce the error rate in 2015 by requiring that the IRS delay disbursement of EITC checks until February, even if a claim was filed much earlier, so that the agency has more time for vetting. Rector has championed several other measures that the Ways and Means Committee could include in future legislation. 

Democrats have remained committed to the idea of expanding the EITC to childless workers, and Rep. Ro Khanna (D-Calif.) is drafting legislation that would raise eligibility thresholds and double the value of the benefits workers can receive. Under Khanna’s proposal, a family with three kids could still get a partial refund if it earns as much as $70,000; the current cutoff is $48,340. The broad outlines of Khanna’s proposal were sketched in part by the Center on Budget and Policy Priorities as a way to make up for wage gains workers have missed out on over the past 30 years.

“Productivity in this country has increased dramatically, but wages haven’t kept up, so American workers are not making what the returns on labor should be,” Khanna said.

Khanna’s proposal has garnered interest from conservative think tanks, but not any Republicans in Congress so far, possibly because his idea would cost more than $1 trillion. Republicans are already trying to paper over at least $3 trillion in lost revenue from their own plan.

“Instead of talking about a $3 trillion tax cut for the investor class, what they should be doing is talking about a tax policy geared toward a working and middle class,” Khanna said.