Expanding the EITC for childless adults

The American Earned Income Tax Credit can reduce poverty rates among families with children. Expanding that benefit -- with some changes-- could help qualifying adults without children of their own, as well.

As the idea of expanding the “childless EITC” gathers steam, it’s time to start thinking about what the next generation of worker credits should look like. Today’s EITC lifts millions of families out of poverty each year by providing a wage subsidy that encourages work. But it largely skips over childless adults. Politicians from President Obama to Senator Marco Rubio (R-FL) are looking at ways to include workers without kids in the EITC or an EITC-like program.

Today, the maximum childless EITC benefit is just $496, less than a tenth of the $5,460 available to families with two children. And what’s more, if you don’t have children, you have to be very low-income to qualify for any benefit at all. Families with two children can receive the EITC until their earnings reach $43,756 ($49,186 if married). But families without children get nothing once they earn $14,590 ($20,020 if married).

There’s no doubt that a significant expansion of the childless EITC could reduce poverty and differences in the tax treatment of families with and without children. (And many workers who do not report children on their tax returns actually do have children, though they may not live with them.)

But before legislators double down on the EITC for childless families, they must get a handle on some yet-to-be answered questions.

First, should we retain the current age limits for the childless EITC? Although a parent at any age who lives with their child can receive the EITC if they meet the other eligibility rules, folks without children must be between the ages of 25 and 64. This excludes most students and all seniors.

Under current law, you cannot receive the childless EITC yourself if you qualify someone else for the credit. Full-time students are often qualifying children, while part-time students are not.  Retaining this rule means full-time students cannot get a childless EITC but getting rid of it means we might be subsidizing a lot of students from upper-middle income families.

One solution would be to lower the age limit to 18 (rather than eliminate it entirely) but keep the qualifying child rule. This could provide a subsidy to part-time student workers as well as young, independent workers without also encouraging them to drop out of high school in favor of work.

At the other end of the age spectrum, should low-income elderly workers benefit from the EITC? Older workers with low enough earnings to qualify for the EITC are at great financial risk during retirement.

The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.

If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.

Steve Holt and I provide a model for reducing marriage penalties by focusing on individual worker earnings, rather than family earnings. This could equalize incentives between primary and secondary earners to work, a move that could help married couples move into the middle class. We propose limiting the worker credits to families with low and moderate joint income, in order to minimize the chances that a low-income worker in a high-income couple would receive the new credit.

Expanding the childless EITC is the right call for policy makers interested in reducing poverty. But policymakers need to answer some tough questions if they are going to get the new policy right.