CRS Analysis Indicates Tax Credits Have 'Significant Antipoverty Impact'

On September 13, 2011, the U.S. Census Bureau released national estimates of the number and percentage of Americans in poverty in 2010. The number and percentage of Americans living in poverty (this percentage is sometimes called the "poverty rate") is calculated by comparing an individual's or family's resources, measured as pre-tax cash income, to a poverty threshold, roughly equal to three times the cost of spending on the U.S. Department of Agriculture's Economy Food Plan. If an individual's or family's resources are less than their applicable threshold, the individual or family is counted as poor.

The current calculation of poverty excludes non-cash benefits and tax credits when determining an individual's or family's resources. Yet, these government programs increase the resources families and individuals have to purchase basic goods. As a result of this omission, policymakers cannot use the official poverty rate to assess the antipoverty impacts of refundable tax credits, and in fact may erroneously conclude that these credits have no effect on poverty. The Census Bureau is developing a Supplemental Poverty Measure (SPM) which would include the impact of non-cash benefits (like food stamps) and tax credits on poverty rates. However, the development of this new measure has been delayed due to budget constraints. Using an alternative poverty measure similar to the SPM, this report analyzes 2009 Census data (the most recent data available) to estimate the impact of three refundable tax credits, the Earned Income Tax Credit (EITC), the child tax credit, and the Making Work Pay (MWP) credit, on poverty rates.

The results of this analysis suggest that refundable tax credits have a significant antipoverty impact among children and families with children. The poverty rate for families with children when all three tax credits are included as part of income (the "comprehensive income measure") is 16.1%. This rate is 29% lower than the poverty rate calculated when all three credits are excluded from income ("the baseline"), and 8% lower than the official poverty rate. Similarly, poverty rates among children fall by 30% compared with the baseline when refundable credits are included as part of income (25.0% to 17.5%). In contrast, since the value of the credits depends not only on earnings, but, in the case of the EITC and the child tax credit, the number of children a taxpayer has, these credits have a negligible impact on poverty rates among childless families, seniors, and singles.

This analysis also indicates that while refundable tax credits contribute to poverty reductions among eligible recipients, they do not raise a majority of their recipients out of poverty. Specifically, on its own the EITC lifts 22% of its eligible recipients out of poverty. The other tax credits have smaller effects on reducing poverty rates among eligible recipients. The child tax credit reduces poverty among eligible recipients by 13.9%, whereas the MWP credit reduces poverty among MWP recipients by 5.4%. However, taken as a whole, these credits reduce poverty among those who are eligible for all three by nearly 47%.

Finally, in light of the President's Fiscal Commission and Domenici-Rivlin Deficit proposal that respectively retain or enhance these credits and potential congressional action to reform the tax code, this report highlights certain limitations of using refundable credits to reduce poverty. Specifically, this report examines how the EITC's policy goal of incentivizing work may reduce its efficiency at reducing poverty and how administrative complexity can lessen both the size and scope of the antipoverty benefits of refundable tax credits.

                            Contents

On September 13, 2011, the U.S. Census Bureau released national estimates of the number and percentage of Americans in poverty in 2010. The number and percentage of Americans living in poverty (this percentage is sometimes called the "poverty rate") is calculated by comparing an individual's or family's resources, measured as pre-tax cash income, to a poverty threshold, roughly equal to three times the cost of spending on the U.S. Department of Agriculture's Economy Food Plan. If an individual's or family's resources are less than their applicable threshold, the individual or family is counted as poor.

The current calculation of poverty excludes non-cash benefits and tax credits when determining an individual's or family's resources. Yet these government programs increase the resources families and individuals have to purchase basic goods. As a result of this omission, policymakers cannot use the official poverty rate to assess the antipoverty impacts of refundable tax credits, and in fact may erroneously conclude that these credits have no effect on poverty rates. The Census Bureau is developing a Supplemental Poverty Measure (SPM) which would include the impact of non-cash benefits (like food stamps) and tax credits on poverty rates. However, the development of this new measure is currently delayed due to budget constraints. Using an alternative poverty measure similar to the SPM, this report analyzes 2009 Census data (the most recent data available) to estimate the impact of three refundable tax credits, the Earned Income Tax Credit (EITC), the child tax credit, and the Making Work Pay (MWP) credit, on poverty rates.

The results of this analysis show that refundable tax credits reduce poverty among families with children, who make up a majority of the poor,¹ but provide limited benefits to families without children and the elderly. In addition, this analysis also illustrates that the credits themselves are not necessarily targeted to provide the greatest benefits to those most in need. These credits, however, were not designed with the sole purpose of reducing poverty, but had other purposes such as subsidizing low-wage work or providing tax relief to families with children.

This report is structured to first provide a general overview of the three credits considered, the EITC, the child tax credit, and the MWP credit. The report then turns to an overview of the growth of the cost and participation rates associated with these credits over time, followed by a brief summary of how poverty is currently estimated and recent efforts by the Census Bureau to create an alternative poverty measure, the SPM², that would, among other things, include the impact of refundable tax credits. Then, this report provides a brief synopsis of how the Census data were analyzed and presents the results of this analysis. Finally, in light of potential congressional action to reform the tax code, this report highlights potential limitations of using refundable tax credits to reduce poverty.

Overview of the Tax Credits

In 2009, the most recent year for which data are available, there were three refundable tax credits available to low-income taxpayers:³ the EITC, the child tax credit, and the MWP tax credit (which expired at the end of 2010). Tax credits allow taxpayers to reduce their federal income tax liability, the taxes owed before tax credits are applied, by the amount of the credit. A nonrefundable tax credit can only reduce a taxpayer's tax liability to zero, while a refundable tax credit can exceed a taxpayer's tax liability, providing a cash payment primarily to eligible recipients with limited tax liability. The actual amount of these credits depends in part on the taxpayer's earnings. Specifically, as illustrated in Figure 1, the amounts of these credits increase over a range of earnings (the phase-in range where the line slopes upward), remain constant (flat) over a subsequent range of earnings, and then phase out to zero (downward-sloping line). The EITC and child tax credit are also affected by the number of eligible children a taxpayer has. The MWP credit is not affected by whether the taxpayer had eligible children. Importantly, the structure of both the EITC and child tax credit generally remain the same between 2009 and 2012.⁴

 

Figure 1. Amount of Selected Refundable Tax Credits for Single

 

Parent with One Child, 2009

 

 

 

The Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is a refundable tax credit available to eligible low-income workers. The EITC is calculated based on a taxpayer's earnings. The credit phases in over a range of earnings which depends on a taxpayer's filing status and the number of eligible children they have. The credit then plateaus and remains constant over a subsequent range of earnings before phasing out to zero (see Figure 1). For example, in 2009, taxpayers with one child who filed as heads of household had their credits phased in at 34 cents for every dollar of earnings (34%) between $0 and $8,950. The credit amount remained constant at $3,043 for earnings between $8,950 and $16,420. For every dollar of earnings above $16,240, the credit phased out at a rate of 15.98%. The credit fully phased out when earnings reached $35,463.

The Child Tax Credit

The Making Work Pay Tax Credit (Expired)

The Making Work Pay (MWP) was a temporary refundable tax credit available to eligible workers in 2009 and 2010.¹³ The credit was calculated as 6.2% of a taxpayer's earnings, up to $400 for individuals and $800 for married couples filing jointly. The MWP credit phased out for taxpayers with income above $75,000 ($150,000 for married couples filing jointly). The credit fully phased out for taxpayers with income above $95,000 ($190,000 for joint filers). Unlike the EITC and child tax credit, which are claimed as a lump sum on income tax returns filed in the following year, the MWP credit was advanced to taxpayers throughout the year as a reduction in the amount of federal income tax withheld from their paychecks.¹⁴ A taxpayer eligible for $400 of the MWP credit received an additional $15 per paycheck if they were paid every two weeks. In addition, since the value of the credit was based solely on earnings, it did not change based on the number of children an eligible taxpayer had. Certain retirees and disabled individuals that generally were ineligible for the MWP credit because they did not work, were eligible for a $250 economic recovery payment.¹⁵ For more information on the Making Work Pay Credit, see CRS Report R40969, Withholding of Income Taxes and the Making Work Pay Tax Credit, by John J. Topoleski.

Over the past 20 years, refundable tax credits, notably the Earned Income Tax Credit (EITC) and more recently the child tax credit, have become increasingly important sources of federal assistance to low-income working families. As illustrated in Figure 2, the refundable portion of the EITC has grown six-fold in terms of outlays,¹⁶ whereas the refundable portion of the child tax credit has more than tripled in budgetary cost between 2002 and 2009 (all figures in 2009 dollars). During the same time period, the number of tax filers claiming either the EITC or child tax credit has nearly doubled. In 2009, the refundable portion of the EITC and child tax credit ranked fourth and sixth, respectively, in outlays among programs targeted towards low-income populations.¹⁷ Two legislative factors have greatly contributed to the growth of the EITC and child tax credit over time.

 

Figure 2. Cost and Number of Recipients of the Refundable Portion

 

of the Earned Income Tax Credit and Child Tax Credit, 1990-2009

 

 

in 2009 dollars

 

 

 

Notes: The number of recipients is the number of tax units claiming the credit. A tax unit can be composed of more than one person, as in the case of a married couple with children filing a joint return or a single parent with one child filing as a head of household. All monetary values are in constant 2009 dollars.

First, direct legislative changes have increased the value of the credits, expanding the size of the refundable portion of the credits. The EITC, which began in 1975 as a program to refund a portion of workers' payroll taxes, expanded over time in part due to legislative changes to the program. Notably, the Omnibus Reconciliation Act of 1993 (OBRA93; P.L. 103-66) expanded the EITC by increasing the credit rate and by making the credit available to childless workers.¹⁸ Recently, the American Recovery and Reinvestment Act (ARRA; P.L. 111-5) increased the credit rate for families with three or more children from 40% to 45%. Similarly, the increase in the number of claimants of the refundable portion of the child tax credit has been largely due to legislative changes that expanded refundability, first under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and most recently under ARRA. ARRA modified the child tax credit so that taxpayers with earnings above $3,000 were eligible for the refundable portion of the credit.¹⁹ The ARRA modifications to the EITC and the EGTRRA and ARRA modifications to the child tax credit are scheduled to expire at the end of 2012.

Second, tax law changes in 2001 and 2003, which lowered taxes, increased the portion of the credit that could be claimed as a refund as opposed to a reduction in taxes. Specifically, EGTRRA and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27) lowered marginal tax rates and increased the income level, sometimes called the "tax entry point," at which income was subject to tax. This resulted in a smaller tax bill for taxpayers at a given income level. With less tax liabilities to offset, a greater proportion of a tax credit could be claimed as a refund.

ARRA also introduced the temporary Making Work Pay (MWP) credit for 2009 and 2010, which reduced taxpayers' tax bills by up to $400 ($800 for married couples filing jointly). This credit, which was originally scored by the Joint Committee on Taxation as costing $116.2 billion over the 2009-2019 budgetary period, reduced taxes of low- and middle-income taxpayers. According to the President's FY2010 budget, one of the goals of this credit was to "put needed money in [families'] pockets for them to make ends meet and cover the costs of necessities."²⁰ By providing low- and middle-income workers with additional money in each paycheck, this proposal was structured to provide economic stimulus that would be spent immediately by its recipients.

The increase in the refundable portion of these credits may reflect multiple policy objectives. In part, refundable credits are a way to provide fiscal stimulus during a recession. The enhanced use of refundable credits may also reflect an increased interest in providing middle-income workers with additional tax relief or an increased interest in delivering low-income assistance through the tax code. Yet, as these credits have grown in size and scope, the Census Bureau's official poverty measure has failed to capture their impact on poverty.

Refundable Credits and Measuring Poverty

Currently, the U.S. Census Bureau's official estimates of the number and percentage of Americans in poverty fail to account for the impact of some government programs, including refundable tax credits, on poverty. The official U.S. poverty measure, which was developed in the 1960s, essentially compares an individual's or family's resources, measured as pre-tax cash income, with a poverty threshold, roughly equal to three times the cost of spending on the U.S. Department of Agriculture's Economy Food Plan.²¹ If a person's or family's income is below the appropriate threshold (based on family size and age) the individual, or in the case of the family, every member of the family, is considered poor.²² In 2009, the poverty threshold for one adult was $10,956; for two adults the threshold was $13,991; and for a family of four (with two children under 18), it was $21,756.

Some experts maintain that measuring a person's resources using pre-tax cash income does not provide an accurate measure of the resources a person has to meet basic needs.²³ For example, individuals and families may incur necessary expenses to hold a job and earn income, such as transportation to and from work and child care. In addition, pre-tax cash income excludes other factors that reduce income like taxes and medical bills. These expenses reduce the resources an individual or family has to pay for basic goods. On the other hand, because in-kind benefits (like food stamps and housing assistance) and refundable tax credits are not considered cash, they are not included as part of pre-tax cash income. Yet these government programs increase the resources families and individuals have to purchase basic goods. In light of these criticisms, there have been several initiatives to revise the current measure of poverty to better reflect, among other things, the actual amount of resources an individual or family has to purchase necessities like food, clothing, and shelter. Most recently, the Census Bureau has begun to develop a Supplemental Poverty Measure (SPM).²⁴

Although the SPM will, like the official poverty measure, compare an individual's or family's resources with a poverty threshold, the calculation of both these components under the SPM will differ from how they are calculated for the official poverty measure. According to the Interagency Technical Working Group on Developing a Supplemental Poverty Measure, the poverty threshold would be based on expenditures on a set of commodities "that all families must purchase: food, clothing, shelter and utilities" ²⁵ with separate thresholds for renters, and owners with and without mortgages. These thresholds would be adjusted for geographic differences in housing costs.²⁶ In addition, the Interagency Working Group reported that "family resources should be estimated as the sum of cash income, plus any federal government in-kind benefits that families can use to meet their food, clothing, shelter, and utility needs, minus taxes (or plus tax credits), minus work expenses (including child care), minus out-of-pocket expenditures for medical expenses."²⁷ The SPM could potentially provide policy makers with valuable information about the impact of government programs, including refundable credits, on poverty rates.²⁸

Due to budgetary constraints, the Census Bureau will not release an SPM for 2010 data concurrently with the release of the official poverty estimates (they do expect to release initial estimates in October 2011).²⁹ However, for many years, the Census Bureau has provided data and formulas for calculating alternative experimental measures of poverty.³⁰ Specifically, these formulas have measured both a family's income and the poverty threshold in a more comprehensive manner similar to the SPM. For the purposes of this analysis, the formulas for this alternative measure will be used in conjunction with Census Bureau data to estimate the impact of refundable tax credits on poverty rates.

Methodology

This report uses data from the Census Bureau, including the Current Population Survey (CPS), to estimate the impact of refundable tax credits on poverty rates in 2009. These data are used in conjunction with formulas provided by the Census Bureau to construct both a comprehensive measure of income as well as poverty thresholds that are most similar to the definitions proposed for the Supplemental Poverty Measure (SPM). Specifically, income is measured by taking all pre-tax cash income, reducing it by taxes, and increasing it by the value of government programs like food stamps, heating assistance, and refundable credits. Alternative poverty thresholds are calculated using actual expenditures on food, clothing, shelter, and utilities and adjusting these thresholds for geographic area and family size.³² Although these definitions are similar to those proposed for the SPM, they differ from the SPM in several ways. For example, the poverty thresholds used in this report are not adjusted for a family's housing status (whether they rent, own a home free and clear, or own a home and make mortgage payments), which may overstate poverty rates for some groups.³³ In addition, since many of the variables used to create a comprehensive SPM-like definition of income are estimated by the Census Bureau using models, (as opposed to being the actual values given by survey respondents), they may change over time as the Census Bureau adjusts and refines these models.³⁴

In order to gauge the impact of refundable credits on poverty rates, every individual's and family's comprehensive income measure is first calculated. Then, for every individual and family, all the credits that a family receives are subtracted from the comprehensive income measure to create a baseline measure of income (see Table 1). This baseline measure of income is then compared with each individual's and family's respective alternative poverty threshold.³⁷ If an individual's or family's income is less than their respective threshold, the individual or family (and all the members of the family) are counted as poor. Then, for each individual and family, tax credits that the individual or family receive are added back to income, which again is compared with their respective alternative poverty threshold. If their income is less than the appropriate threshold, the individual or family is counted as poor. For example, in the third row of Table 1, if the EITC is claimed by an individual or family, it is added to that individual's or family's baseline measure of income, and this income measure is compared with the appropriate poverty threshold. This process is repeated for the child tax credit and MWP credit, as well as for combinations of credits, until all the credits have been added to the baseline measure to reach the comprehensive measure of income. Children, working-age adults, and seniors are counted as poor if individually they live without a family and their income is less than their poverty threshold or, if they are a member of a family, that family is poor (see columns three through five in Table 1).

Results

The data in Table 1 suggest that refundable tax credits have a significant antipoverty impact among children and families with children. The poverty rate for families with children using a comprehensive income measure (16.1%) is 29% lower than the poverty rates using the baseline measure of income (22.7%). In fact, the addition of the credits to the baseline income lowers poverty rates among families with children below the official poverty rate (16.1% using a comprehensive measure compared to 17.5% using the official measure). Similarly, poverty rates among children fall by 30% compared to the baseline when refundable credits are included as part of income (25.0% to 17.5%). In addition, recent CRS analysis³⁸ of taxes and transfer programs indicates that after accounting for the EITC and child credit, poverty rates among single-mother-headed households actually fell during the recession, whereas official poverty rates rose. Hence, these credits, which were both expanded by ARRA, can have significant antipoverty effects even during recessionary periods when incomes tend to fall.

        Table 1. Impact of Refundable Tax Credits on Poverty Rates, 2009

In contrast, since the value of the largest credits, the EITC and the child tax credit, depends in part on the number of children a taxpayer has, these credits have a negligible impact on poverty rates among childless families. Specifically, the EITC and child tax credits combined reduce poverty rates among families without children by one-tenth of one percentage point (10.4% to 10.3%) in relation to the baseline, whereas the MWP credit reduces poverty by five-tenths of one percentage point (10.4% to 9.9%) in comparison to the baseline.

In addition to childless families, the data from Table 1 also indicate that other groups, notably singles and seniors, are largely excluded from the benefits of refundable tax credits. Poverty rates calculated using a comprehensive income measure are higher among singles and seniors than the poverty rate among families with children (25.9% and 16.8% for singles and seniors compared with 16.1% for families with children).

Using this comprehensive measure of income, poverty among seniors is nearly double the rate under the official measure. Poverty rates among older Americans may be higher for a variety of reasons, including that seniors tend to have higher medical expenses, which reduce the income they have to meet their basic needs.³⁹ The poverty rate among seniors is largely unchanged by refundable credits, since seniors generally don't work or have children, although they may receive some of the benefit if they live in a family that receives the EITC or child tax credit.

Similarly, the poverty rates among singles⁴⁰ are relatively unaffected by refundable tax credits, falling by 1.9% (26.4% under the baseline to 25.9% using a comprehensive income measure). While singles may be eligible for the EITC and MWP credit, the combined maximum of the EITC ($457) and MWP ($400) for singles in 2009 is still significantly less than the maximum EITC a family with one child can receive ($3,043). In addition, singles working at a minimum wage job ($7.25 per hour) will tend to have earnings that are high enough to make them ineligible for the EITC.⁴¹ Finally, singles will be ineligible for the child tax credit.

Refundable tax credits contribute to poverty reductions among eligible recipients, but they do not raise a majority of their recipients out of poverty. For example, as illustrated in Table 2, although 46% of EITC recipients are poor, the EITC lifts 22% of its recipients out of poverty. The depth of a family's poverty may be one factor that limits the efficacy of the EITC to reduce poverty. Data from the Joint Committee on Taxation⁴² indicate that while roughly half (54%) of the $54.98 billion in EITC benefits go to those with income under $20,000, 15% goes to those with incomes below $10,000. Hence, although the EITC may reduce the severity of poverty, it may not be large enough to lift the majority of its recipients out of poverty. The other tax credits have smaller effects on reducing poverty rates among eligible recipients. The child tax credit reduces poverty among eligible recipients by 13.9%, whereas the MWP credit reduces poverty among MWP recipients by 5.4%. However, taken as a whole, these credit reduce poverty among those who are eligible for all three by nearly 47%.

                 Table 2. Poverty Rates Among Credit Recipients

In 1993, President Clinton pledged to use the EITC to eliminate poverty. The intent was not to reduce poverty directly by providing a refund, but rather to reduce poverty indirectly by encouraging low-wage workers to work more hours.⁴⁴ Economic theory suggests that by providing a constant wage subsidy over the phase-in range of earnings, the credit would increase the marginal benefits of work (i.e., after-tax income would rise by the EITC), encouraging a worker to begin work or to work additional hours.⁴⁵ However, the work incentive goal of the EITC may reduce the credit's ability to directly reduce poverty. If the EITC had been structured to solely provide direct poverty reduction, it would provide a larger benefit to the poorest individuals, with the benefit decreasing as income rose. For example, those making $5,000 would receive a credit large enough to raise their income to the poverty threshold. By contrast, those individuals whose pre-tax credit income placed them at or above their poverty threshold would receive no credit. Yet, theoretically, this structure of the EITC would disincentivize low-income workers from beginning work or working more, since work would reduce the size of their refundable credit. Hence these credits may not eliminate poverty among their eligible populations because they are structured to achieve other, sometimes competing, purposes.

Conclusion

In light of the limited impact of refundable credits on families without children, some experts have suggested reformulating the current credits into a worker credit and a child credit that would provide additional financial support to childless workers.⁴⁶ In the context of fundamental tax reform, the Domenici-Rivlin Plan proposes replacing the EITC and child tax credit (and eliminating personal exemptions and the standard deduction) with a refundable child credit of $1,600 per child and a refundable earnings credit of 21.3% of the first $20,300 of a worker's earnings.⁴⁷ This proposal generally expands these credits and provides additional assistance to childless workers, but does not provide the greatest benefit to the poorest individuals.

The President's Fiscal Commission, in contrast to the Domenici-Rivlin proposal, proposes retaining the credits in their current form in the context of fundamental tax reform. Since the refundable portion of the child tax credit is scheduled to expire for most families at the end of 2012, and the EITC is scheduled to fall in value for families with three or more children at the same time, retaining current (2009-2012) policy will provide continued antipoverty benefits to many low-income families.⁴⁸ However, some experts are hesitant about providing low-income financial assistance through the tax code, especially given recent reports of fraud among taxpayers claiming the EITC. According to a recent report by the Treasury Inspector General for Tax Administration, 23% to 28% of EITC payments were issued improperly in FY2009.⁴⁹

In addition, there are several issues with the administration of tax credits which might limit their suitability as poverty reduction programs. First, refundable credits, excluding the MWP credit, are paid in a lump sum in the following year (i.e., 2009 credits are claimed on returns filed in 2010). This makes them poorly suited to provide continual assistance that low-income families may need. In addition, because many Americans find preparing and filing their tax returns difficult, a significant number of taxpayers, including more than half of taxpayers with income under $50,000, rely on paid tax preparers to prepare their tax returns. For low-income taxpayers, this reduces the value of their credits, lessening their antipoverty benefits.⁵⁰ Finally, using the tax system to administer poverty reduction programs excludes those who do not file tax returns. A substantial portion of nonfilers are estimated to be elderly.⁵¹

Yet, despite the limitations of these credits to reduce poverty, and issues surrounding their administration, the evidence presented in this report indicates that they do provide substantial financial assistance to taxpayers with children. The SPM, which would include these credits when measuring poverty, will potentially provide policy makers with a more accurate annual assessment of their antipoverty impact.

Author Contact Information

² Poverty estimates produced using the Supplemental Poverty Measure (SPM) are for statistical purposes only.

³ For the purposes of this report, the term "taxpayers" will be in reference to low-income tax filers who may or may not actually owe and pay taxes. Although many low-income Americans do not pay federal income taxes, more than two-thirds of people who do not pay income tax do pay payroll taxes and about half owe payroll taxes that exceed their refundable credits. In addition, they may also pay state and local taxes. For more information, see Roberton Williams, Why Nearly Half of Americans Pay No Federal Income Tax, Tax Facts from the Tax Policy Center, June 2010.

⁴ The actual amount and earnings thresholds of the EITC increase every year based on inflation.

⁵ U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, 111^th Cong., 2^nd sess., December 15, 2010, JCS-3-10 and "Table 2. EITC and Recipients 1975-2008" presented in CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview, by Christine Scott

⁶ Among taxpayers with eligible children who claim this credit, their children must either be under 18 years old, under 24 years old if their children are full time students, or their children must be permanently and totally disabled.

⁷ In addition, childless taxpayers who claim the EITC must be between 25 to 64 years of age.

⁸ U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, 111^th Cong., 2^nd sess., December 15, 2010, JCS-3-10 and the Internal Revenue Service, Statistics of Income, Table 3.3.

⁹ For purposes of the child tax credit, children must be under 17 years old at the end of the tax year for which the credit is claimed.

¹⁰ The child tax credit is schedule to revert to its pre-2001 structure at the end of 2012. At this time, the refundable portion of the credit will be unavailable to most families.

¹¹ Generally, it takes $20,000 of income above the threshold to completely eliminate $1,000 of the child tax credit. Hence, single parents with one child will be ineligible for the credit if their income is above $95,000.

¹² These data include the payments made to government retirees that were ineligible for the MWP credit. Internal Revenue Service, Statistics of Income. Historic Table 2. http://www.irs.gov/taxstats/article/0,,id=171535,00.html. The refundable credit data is from the Internal Revenue Service, Statistics of Income, Table 3.3.

¹³ The MWP credit was enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) and expired at the end of 2010. At the end of 2010, Congress enacted legislation, P.L. 111-312, that created a one-year Social Security payroll tax reduction. This provision reduced the employee's payroll tax rate from 6.2% of earnings to 4.2% of earnings for 2011. The payroll tax reduction provides less tax relief than the MWP credit to low-income individuals earning less than $20,000.

¹⁴ Prior to 2011, workers could elect to receive their EITC payments throughout the year instead of as a lump sum the following year. This program, called the Advanced Earned Income Tax Credit, was repealed as part of P.L. 111-226.

¹⁵ For more information, see http://www.irs.gov/newsroom/article/0,,id=205927,00.html.

¹⁶ The refundable portions of refundable credits are counted as outlays, while the portions of these credit which offset income and other taxes are counted as reductions in revenue.

¹⁷ See Table 2 in CRS Report R41625, Federal Benefits and Services for People with Low Income: Programs, Policy, and Spending, FY2008-FY2009, by Karen Spar.

¹⁸ OBRA93 increased the credit rate from zero to 7.65% for low-income workers with no children, from 23% to 34% for workers with one child, and from 25% to 40% for workers with two or more children. For more information, see Congressional Budget Office, An Economic Analysis of the Revenue Provisions of OBRA-93, January 1994, http://www.cbo.gov/ftpdocs/48xx/doc4832/doc03.pdf.

¹⁹ For a more detailed legislative history, including legislative changes that expanded refundability, see CRS Report R41873, The Child Tax Credit: Current Law and Legislative History, by Margot L. Crandall-Hollick.

²⁰ Office of Management and Budget, A New Era of Responsibility: Renewing America's Promise, February 2009, p. 18.

²¹ Many government aid programs use a different, but related, poverty measure to determine eligibility for aid. These measures can be found in The Department of Health and Human Services (HHS) poverty guidelines at http://aspe.hhs.gov/poverty/index.shtml.

²² For more detailed information on how the Census Bureau calculates poverty, see http://www.census.gov/hhes/www/poverty/about/overview/measure.html.

²³ For more information, see Kathleen Short, "The Supplemental Poverty Measure: Examining the Incidence and Depth of Poverty in the U.S. Taking Account of Taxes and Transfers," 86^th Annual Conference of the Western Economic Association International, June 30, 2011, http://www.census.gov/hhes/povmeas/methodology/supplemental/research/WEA2011.kshort.071911_2.rev.pdf.

²⁴ This measure would not replace the official poverty measure, but would be published alongside it as an alternative poverty measurement.

²⁵ Interagency Technical Working Group on Developing a Supplemental Poverty Measure, Observations from the Interagency Technical Working Group on Developing a Supplemental Poverty Measure, March 2010, http://www.census.gov/hhes/www/poverty/SPM_TWGObservations.pdf.

²⁶ For more information, see http://www.census.gov/newsroom/releases/pdf/2010_Report.pdf.

²⁷Observations from the Interagency Technical Working Group on Developing a Supplemental Poverty Measure, March 2010.

²⁸ For a detailed history and analysis of the current poverty measure and efforts to modify the current measure, which is beyond the scope of this report, see CRS Report R41187, Poverty Measurement in the United States: History, Current Practice, and Proposed Changes, by Thomas Gabe.

²⁹ According to the Census "Since the FY 2011 federal budget did not include the funding requested by the President for the Supplemental Poverty Measure (SPM) initiative, the Census Bureau and the Bureau of Labor Statistics do not currently have the resources necessary to move the Supplemental Poverty Measure from research mode to production mode. Without these additional resources, the September 2011 release date for the Supplemental Poverty Measure estimates suggested in the Interagency Technical Working Group document is not feasible." http://www.census.gov/hhes/povmeas/methodology/supplemental/update.html.

³⁰ For more information, see http://www.census.gov/hhes/povmeas/methodology/nas/report.html.

³¹ For more information, see http://www.irs.gov/newsroom/article/0,,id=204468,00.html.

³² These thresholds are not generally significantly larger than the official poverty thresholds. For example, one study found that while the official poverty threshold for a two-adult, two-child family was $21,756 in 2009, it was $23,854 using a proposed supplemental poverty measure. In addition, when researchers adjusted for housing status, they found that some groups, notably homeowners without mortgages, actually had a lower poverty threshold ($20,298) than the official level. For more information see Kathleen Short, The Supplemental Poverty Measure: Examining the Incidence and Depth of Poverty in the I.S. Taking Account of Taxes and Transfers, 86^th Annual Conference of the Western Economic Association International, June 3, 2011.

³³ According to the Census, "a significant number of low-income families own a home without a mortgage and therefore have quite low shelter expense requirements. Not taking this into account may overstate their poverty rates. This suggests the need to adjust the thresholds for housing status, distinguishing renters, owners with a mortgage, and owners without a mortgage." For more information, see http://www.census.gov/hhes/www/poverty/SPM_TWGObservations.pdf.

³⁴ The CPS tax models may under represent the actual impact of refundable tax credits. According to one study, "less than two thirds of the [EITC] dollars paid out are captured by the CPS. The discrepancy between IRS and CPS figures is a major unresolved puzzle." For more information, see Bruce D. Meyer, "The Effects of the Earned Income Tax Credit and Recent Reforms," in Tax Policy and the Economy, vol. 24 (National Bureau of Economic Research, 2010).

³⁵ Currently, the Census Bureau counts unrelated subfamilies in a different category than other families. An unrelated subfamily could for example be a married couple (family A) who move into the basement of another family's house (family B). Currently, the Census excludes family A from the pool of "families." Instead they are counted in a separate pool of "unrelated subfamilies." For the purposes of this analysis, family A will be counted as a family, although a distinct family from family B.

³⁶ The SPM treats a family unit slightly differently in that it counts unmarried partners as a family unit and includes unrelated individuals under 15 living with a family as part of that family.

³⁷ Since thresholds depend on family size, age of family members, and geographic location, there are too many different thresholds to present in this analysis, but they can be estimated by the author upon request.

³⁸ See Figure 13 in CRS Report R41917, Welfare, Work, and Poverty Status of Female-Headed Families with Children: 1987-2009, by Thomas Gabe. This analysis uses a somewhat different definition of income and poverty threshold than the one used in this report.

³⁹ Subtracting medical out-of-pocket expenses from income raised poverty rates by seven percentage points according to one study. For more information, see Kathleen Short, The Supplemental Poverty Measure: Examining the Incidence and Depth of Poverty in the U.S. Taking Account of Taxes and Transfers, 86^th Annual Conference of the Western Economic Association International, June 3, 2011.

⁴⁰ Singles include persons in all age groups, including seniors.

⁴¹ In 2009, the EITC equaled zero when income was $13,440. A person working a minimum wage job 40 hours per week, 50 weeks per year, would earn $14,500.

⁴² See Table 3, U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, committee print, 111^th Cong., 2^nd sess., December 2010, JCS-3-10.

⁴³ See Table 3, U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, committee print, 111^th Cong., 2^nd sess., December 2010, JCS-3-10.

⁴⁴ For more information, see CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview, by Christine Scott.

⁴⁵ While some studies have indicated that the EITC does encourage some individuals, particularly single mothers, to join the workforce, recent studies have concluded that changes to the tax code have a very minor impact on changing the number of hours worked among both single and married women. This may indicate that overall, tax changes, including refundable credits, have very little impact on the number of hours people work generally. This may be because low-wage workers have little say over the number of hours they work or because the relationship between the number of hours worked and the exact amount of their refundable tax credit is not clear until the following year when they file their tax return. For more information on the impact of the EITC on joining the workforce, see CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview. For more information on the responsiveness of the female labor force to tax incentives, see Kelly Bishop, Bradley Heim, and Kata Mihaly, "Single Women's Labor Supply Elasticities: Trends and Policy Implications," Industrial and Labor Relations Review, vol. 63, no. 1 (October 2009) and Bradley Heim, "The Incredible Shrinking Elasticities," The Journal of Human Resources, vol. 42, no. 4 (Fall 2007).

⁴⁶ For more information, see Steve Holt and Elaine Maag, Considerations in Efforts to Restructure Work-Based Credits, Tax Policy Center, November 2009.

⁴⁷ The National Commission on Fiscal Responsibility and Reform proposes retaining the EITC and child tax credit in their current form. For more information, see http://www.fiscalcommission.gov. For more information on the Domenici-Rivlin proposal, see http://www.bipartisanpolicy.org/projects/debt-initiative/about. Note that neither of these credits in the Domenici-Rivlin proposal would phase-out and they would be administered as adjustments to federal income tax withholding.

⁴⁸ For a more substantive discussion of policy options related to the EITC and child tax credit, see CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview, by Christine Scott and CRS Report R41935, The Child Tax Credit: Economic Analysis and Policy Options, by Margot L. Crandall-Hollick.

⁴⁹ For more information, see http://www.treasury.gov/tigta/auditreports/2011reports/201140023fr.pdf.

⁵⁰ Internal Revenue Service, SOI Tax Stats., Table 2, Individual Income and Tax Data, by State and Size of Adjusted Gross Income, Tax Year 2007.

⁵¹ For more information, see Peter R. Orszag and Matthew G, Hall, Nonfilers and Filers with Modest Tax Liabilities, Tax Facts from the Tax Policy Center, August 2003.