5 Reasons Why Strengthening the EITC and CTC Is the Kind of Tax Reform America Needs
As Americans filed their taxes this season—a process filled with confusion for many and startlingly small refunds for some—Democrats in Congress offered a sharp contrast to President Donald Trump’s unpopular tax law in the form of two ambitious tax plans that actually work for working families. While Trump’s 2017 tax law rewrote the tax code to further enrich millionaires, billionaires, and wealthy corporations, congressional Democrats’ proposals—the American Family Act (AFA) and the Working Families Tax Relief Act (WFTRA)—would double down on two of the tax code’s most effective income boosters for working and middle-class families: the earned income tax credit (EITC) and the child tax credit (CTC). Rather than push the nation even further toward inequality—a trend accelerated by Trump’s tax law—these tax plans offer smart investments to help everyday families feeling the stress of flat wages and the rising costs associated with reaching and staying in the middle class. For example, Center for American Progress analysis shows that under the AFA, a minimum wage worker who has two young children would see their CTC boosted by more than $100 a week—greater than the $75 CTC increase they receive from the Trump tax law for the entire year.
This is the kind of policy that workers and families desperately need. More than 40 percent of U.S. households are struggling to afford basics such as food and housing, while 70 percent of voters faced at least one serious economic hardship in the last year. Moreover, 4 in 10 American adults would not be able to readily come up with $400 in an emergency. The WFTRA would help alleviate these financial pressures by increasing the incomes of an estimated 46 million households—including 9 million Latinx households, 8 million black households, and 2 million Asian American households—while the AFA would cut the child poverty rate by more than one-third. Here are five reasons this progressive tax vision is the kind of tax reform America actually needs.
Dramatically reduces child poverty
Both the AFA and the WFTRA include bold ideas to reduce child poverty through major investments in the CTC. The bills would make the CTC fully refundable, effectively transforming the credit into a child allowance similar to what many other developed nations have long had in place, including the United Kingdom and Canada. This investment would also ensure that the poorest families are no longer left behind by the CTC’s minimum earnings threshold. Importantly, the proposals would also index the CTC to inflation so it keeps pace with expenses and would deliver monthly benefits to help families meet their expenses without needing to wait for tax time.
In recognition that the early years of life are the most critical for child development, both bills also propose a new young child tax credit—an idea originally developed by the Center for American Progress—to help families shoulder the costs of raising young children and invest in kids when it matters most. The cost of diapers alone makes up nearly 14 percent of after-tax income for families in the bottom 20 percent of the income distribution, and in 33 states, the average cost of full-time center-based infant care is greater than the average cost of in-state college tuition and fees. Researchers at Columbia University estimate that the AFA’s improvements to the CTC alone would shrink child poverty by nearly one-third and reduce the share of children in deep poverty—those living at or below half the poverty line—by nearly half. Meanwhile, the WFTRA would expand the EITC for families with children by 25 percent and protect 7 million people, including 3 million children, from poverty. These investments stand in sharp contrast to the lopsided Trump tax law, which made wealthy parents earning hundreds of thousands of dollars newly eligible for the full credit while leaving behind 26 million children in low- and moderate-income families, who did not fully benefit from the tax law’s CTC increase.
Promotes children’s economic mobility
In addition to dramatically reducing poverty and hardship today, these investments would pay long-term dividends, as modest increases in struggling families’ household income have long-lasting, far-reaching benefits throughout a child’s life. For example, one study found that a $3,000 increase in family income for low-income children under age 5 leads to a 17 percent average earnings increase in adulthood. Exposure to poverty and economic instability can have lasting consequences for children’s health, educational, and employment outcomes. A recent study from the National Academy of Sciences revealed that child poverty costs the American economy as much as $1.1 trillion in lost gross domestic product (GDP) annually. However, the latest Organization for Economic Cooperation and Development (OECD) data show that the United States spent just 1.1 percent of GDP on family benefits in 2015—less than half of the OECD average of 2.4 percent.
Helps workers without dependent children, as well as working students and seniors
In addition to boosting the EITC for families with kids, the WFTRA calls for substantially increasing the credit for several groups of workers whom the EITC currently leaves behind. More than 7 million low-income workers without dependent children are taxed, or taxed more deeply, into poverty, in large part due to the small EITC benefit they receive—a maximum of just $529 per year. The WFTRA proposes nearly quadrupling the current maximum EITC for these workers to $2,074. The plan also calls for important advances for working students and older workers—two groups who are particularly economically vulnerable yet currently ineligible for the EITC, as it is limited to workers ages 25 to 64. The WFTRA proposes lowering the minimum eligibility age to 19 years old and raising the maximum age to 67, boosting these workers’ wallets with income that could provide much-needed cash for textbooks or prescription medications.
Reduces reliance on predatory payday lenders
In addition to boosting the EITC’s value for workers and families, the WFTRA advances an innovative new idea—first proposed by the Center for American Progress in 2014—to allow families to access up to $500 as an advance on their EITC refund. At a time when 4 in 10 Americans don’t have even $400 in the bank, this proposal would help reduce the number of people turning to predatory payday loans. According to the latest data, 12 million Americans annually resort to these loans. Though they average only $375 each, payday loans can lead to a cycle of poverty, driving Americans—and particularly people of color, who are especially targeted for these loans—deeper and deeper into debt. In addition to helping families avoid payday loans, the $500 advance could also be used to make mobility-enhancing investments, such as summer camp, that might otherwise be out of reach.
Invests in hard-hit Puerto Rico
The WFTRA makes a huge investment in Puerto Rico, ensuring that Puerto Ricans are treated the same as other Americans when it comes to receiving EITC and CTC. It rectifies a long-standing inequality in the tax code by ensuring that Puerto Rican families with fewer than three children can claim the CTC. The bill also creates a match for the new Puerto Rican EITC, injecting hundreds of millions of dollars into the Puerto Rican economy. These improvements are especially timely given the economic challenges Puerto Rico is currently facing, in part due to insufficient investment by the Trump administration. They would serve to reduce Puerto Rico’s elevated child poverty rate and promote labor force participation.
These bills aren’t just good policy; in contrast to President Trump’s deeply unpopular tax law, they’re also precisely the kind of tax reform Americans want to see their leaders embrace. For example, while just 36 percent of registered voters support President Trump’s tax law, 6 in 10 support expanding the EITC for workers without dependent children. There is growing momentum to enact tax policies that benefit everyday families, rather than the wealthy. The groundswell of support for a more progressive tax code is evidenced not only by the fact that nearly every Democrat in Congress is a co-sponsor of these bills, but also by the steady stream of additional proposals to strengthen the EITC and CTC.
This ambitious legislation is among the clearest articulations to date of the society in which Americans can live if leaders advance policies that put children and families first—instead of the ultrarich and wealthy corporations.
Katherine Gallagher Robbins is the senior director of poverty policy for the Poverty to Prosperity Program at the Center for American Progress. Rebecca Vallas is the vice president for the Poverty to Prosperity Program at the Center.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.
Katherine Gallagher Robbins
Senior Director of Poverty Policy