Why expanding the Earned Income Tax Credit is popular on both sides

The American working class lost a shocking amount of wealth in recent decades as wages stagnated. Despite campaign promises, making up that lost ground will be no easy feat.

Creating more well-paying jobs would help, but that could take years. Tax cuts could mean bigger paychecks for higher earners but won’t immediately help the many working people who don’t pay federal income taxes — people in the bottom 40% of incomes receive more back from the federal income tax system on average than they pay in, thanks to tax credits.

Expanding those credits, on the other hand, quickly could make a real difference in people’s lives and help return some of the income that’s been sacrificed to changing economies and technology.

Specifically, we could follow President Ronald Reagan’s lead and increase the Earned Income Tax Credit.

Support from both sides

A quick history: The credit, created in 1975 to help lower-income workers offset Social Security taxes, was greatly expanded under Reagan, who championed it as a way to reduce poverty while making work more attractive than welfare. Because the credit is refundable, low- and moderate-income working people can get money back from the government in the form of a refund even if their tax liability is zero.

The credit continues to have broad bipartisan support. Last year both President Barack Obama and House Speaker Paul D. Ryan, R-Wis., proposed expanding the credit for low-income workers without children.

“There’s agreement on both sides of the aisle that this [increasing the credit] is a reasonable thing to do,” says Roberton Williams, senior fellow at the Tax Policy Center.

Lawmakers understand that the credit, while helpful, has been no match for the income and wealth losses workers suffered as globalization and technology wipe out better-paying manufacturing jobs. The working class — defined as households earning between $23,300 and $40,500 in 2013 — lost more than half of its wealth between 1998 and 2013, according to Federal Reserve statistics. The whopping 52.7% drop in this group’s median net worth compares with a 19.1% drop for middle income households and a 20.7% decline overall.

Working-class debt levels rose 47.9% during this period while their financial assets — primarily money in bank and retirement accounts — shriveled by 56%. The wealth loss started long before the latest recession and continued afterward.

“Globalization has been a very good thing for our country economically, but some people lose, and some people lose big, and it’s not their fault,” says Chuck Marr, director of federal tax policy for Center on Budget and Policy Priorities.

The cost of making work pay again

Helping workers restore this lost ground won’t be cheap, of course. Neil Irwin, senior economics correspondent for The New York Times, reports that it would cost about $1 trillion over the next decade. Irwin asked the Tax Policy Center and the Center on Budget and Policy Priorities to figure the cost of expanding the credit to replace all the income lost by the bottom 20% of earners since 1979.

Because the credit rises along with wages until reaching a plateau and phasing out, expanding it enough to restore the income of the bottom 20% would also replace about half the income lost by the next 20% of earners, Marr says. Marr offers examples of how it could work:

• A single parent with one child and $16,000 in income currently pays $1,224 in payroll taxes (primarily for Social Security and Medicare) and zero federal income taxes. Under expansion, his earned income credit would increase by $3,103 to $6,476.
• A married couple with two children and $32,000 in income currently pay $2,768 in income and payroll taxes. Their earned income credit would increase by $5,126 to $8,953.
• For a family of four, the credit would not phase out until the household earned nearly $70,000.

A trillion dollars is a lot. But President Donald Trump’s proposed tax cuts, which would primarily benefit corporations and wealthier people, would reduce federal revenue by $4.4 trillion to $5.9 trillion over 10 years, according to Tax Foundation estimates.

Expanding the credit would be one way to assure that working people, and not just the well-off, have a path toward creating more wealth.

Liz Weston is a certified financial planner and columnist at NerdWallet, a personal finance website, and author of “Your Credit Score.” Email:lweston@nerdwallet.com. Twitter: @lizweston.

This article was written by NerdWallet and was originally published by The Associated Press.