Reform EITC to Support Married Couples & Working-class Families
Many center-right policymakers have begun to consider how the federal government can better support families with children — especially those in the working class. To this end, the Earned Income Tax Credit (EITC) is the ideal policy tool because it already reaches millions of hard-working families, and research shows it supports employment and benefits children. An EITC expansion also presents the opportunity to reduce marriage penalties facing lower-income couples, which work against one of the best ways for children to escape poverty — having two married parents.
Increasing the EITC for married families would improve one of our nation’s most vital anti-poverty programs. Each year, the EITC lifts an estimated 5.6 million people out of poverty, including 3 million children, by supplementing the earnings of low-income families. But in some cases, low-income parents receive much higher EITC benefits if they choose to remain single, undermining marriage as one of the most essential anti-poverty tools.
The EITC “marriage penalty” arises because the program’s income threshold does not differ substantially between married and unmarried families. Married couples have the potential for two incomes, so EITC benefits can be reduced or eliminated entirely when two working parents marry. In fact, two unmarried parents with one child — each earning $25,000 per year — will lose about $3,360 in total tax benefits if they marry, almost all of which comes from lost EITC benefits because their combined incomes push them above the eligibility thresholds.
A better approach is to provide similar EITC benefits to married and unmarried families. Currently, the EITC begins to phase out at higher income for married families ($25,000 for married tax filers versus $19,000 for singles), but not enough to reduce marriage disincentives. We propose that Congress increase this threshold to $40,000 for married couples and phase out the EITC more slowly (10 percent) than the current 16 percent phase-out rate for families with one qualifying child and 21 percent for those with two. Under this proposal, children in married families would receive an EITC that is similar to what their counterparts with unmarried parents would receive.
The result of this change for families would be dramatic. Our analyses highlight marriage penalties between $2400 and $3600 for low-income couple who choose to marry (caused by a smaller EITC and more income tax liability). Our proposal would reduce this penalty by between 60 and 100 percent. For parents with two children, the reduction in the marriage penalty would be even larger and in some cases provide a marriage bonus.
We know from decades of social science research that children raised by two married parents are more likely to flourish educationally, emotionally, and financially in life compared to their peers raised by unmarried parents. Still, many safety net programs for low-income families in the US are more generous for unmarried families, including SNAP, Medicaid, housing assistance, and the EITC. Even more important is the idea of fairness. The federal government has eliminated marriage penalties for upper-income Americans through the tax code while largely leaving the penalties for lower-income Americans intact.
Another motivation for reforming the EITC is to address the relative dearth of federal benefits for working- and middle-class parents, who earn too much to qualify for means-tested programs such as SNAP and Medicaid and too little to take advantage of tax breaks higher-income parents enjoy such as childcare tax credits. Our EITC proposal would offset some of the current imbalance of tax breaks and benefits going toward extremely low or high-income families.
Further, we know that financial strain can be a source of relationship instability for married couples — especially working- and middle-class couples who may struggle to afford child-related expenses. A few thousand dollars of support for these families could go a long way to help children flourish while bolstering strong relationships between parents.
Lastly, this proposal would be costly but the potential benefit for children is tremendous. Using the AEI Open Source Policy Center’s “Tax Brain” tool, we estimate that it would cost an additional $35 billion per year, on top of the more than $65 billion currently spent on the EITC each year. Additionally, more than 85 percent of added benefits from this reform would go to households making less than $100,000 per year, appropriately targeting middle- and low-income families. Targeting the expansion to families with young children could reduce costs, as would increasing the phase-out rate to more than 10 percent once families reach higher levels of income.
We know that having two married parents can offer substantial benefits to children. We also know that the EITC is one of our most effective anti-poverty policy tools. Reforming the EITC to reduce marriage penalties will help ensure that our public policies match the family structure that we know is best for children.
Angela Rachidi is the Rowe Scholar in Poverty Studies at the American Enterprise Institute. Robert Cherry is a recently retired Brooklyn College economics professor and a member of 1776 Unites.