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Blog: A Tax Credit Bill That Would Aid People in Poverty and Cut Corporate Breaks

Apr 01, 2014 | By Carolyn Burstein, NETWORK Communications Fellow

Senator Patty Murray (D-WA) introduced new legislation, called the “21st Century Worker Tax Cut Act,” on March 26, 2014, which would increase the maximum Earned Income Tax Credit (EITC) for childless workers to about $1400 from $487 currently and reduce the childless worker eligibility age for the credit from 25 to 21.

It would also create a new tax deduction for low-to-middle income families with two earners and at least one child age 12 or less, allowing a 20% deduction on the secondary earner's income.

For middle-income families the tax deduction would apply only to those with gross-adjusted family income below $130,000 (with phase-out starting at $110,000) and apply to no more than $60,000 for the secondary earner. This would enable a middle income family to benefit from a lower federal tax bill.

For low income earners, the tax deduction would help increase EITC benefits. For example, if a family has two minimum wage workers and the earnings of one is reduced by 20% for purposes of calculating the EITC, they may be able to apply for the EITC. At the present time, two minimum wage workers might earn more than the maximum allowed for calculating the credit. The additional amount of credit would likewise help to offset childcare, transportation and other costs associated with the working status of a second earner. Thus, working poor families would finally see economic gain from a spouse's labor supply.

The bill also doubles the penalties for taxpayers who fail to comply with the IRS' requirement for "due diligence," a reform that addresses Republican concern about fraudulent claims. Since about 70% of all EITC claims are handled by tax preparers, the penalty would primarily fall on their bank accounts.

The bill already has two co-sponsors: Senator Jack Reed (D-RI) and Senator Sherrod Brown (D-OH).

As the EITC operates now, people under the age of 25 who do not have custody of their children, even though they are paying child support, are ineligible for the EITC. Those between the ages of 25 and 64 can receive the EITC, but the maximum credit is $487, compared to an average credit of $2,905 for families with children, according to a March 26 article in the Nation. The changes proposed in Murray's bill in expanding benefits to childless adults would benefit about 13 million people, a Treasury Department estimate.

The expanded EITC in Murray's bill would cost $144.9 billion over 10 years, which she proposes to pay for by closing widely-criticized tax loopholes used by corporations and their executives.

First, by reducing the tax breaks a corporation may take on paying stock options to an executive to $1 million per year. This change would subject stock options to the same $1 million per year deduction limit that already applies to cash compensation.

Second, in an attempt to deter companies from shifting their U.S. profits to offshore tax havens (e.g. to Bermuda or the Cayman Islands), corporations would be required to pay an effective tax rate of 15% on these profits unless they were derived from legitimate business operations in a foreign country.

Given past Republican support for the EITC, it will be intriguing to see how Republicans will react to Senator Murray's bill. In the recent past they have denied the long-term unemployed any emergency benefits; have fought to deny Medicaid benefits to low-income families and made repeated attempts to repeal the Affordable Care Act (ACA); cut billions of dollars from food stamps; and staunchly resisted proposals to raise the minimum wage, yet they have simultaneously professed their commitment to the poor.

The one area that appears exempt from Republican criticism is the EITC; in fact, the tax credit plan has received praise in Paul Ryan's report on the War on Poverty. Others (e.g. Marco Rubio, Glenn Hubbard, Gregory Mankiw) have also spoken favorably of the efficiency and effectiveness of the EITC, especially as a tool to allay dependency. By encouraging individuals to work, the EITC addresses the enduring criticism that traditional transfer programs discourage work.

Interestingly, the president's 2015 budget proposal also contains provisions for boosting the EITC for childless workers, but the wisdom of Murray's bill is that she couples her EITC increases with the dual earner deduction piece, of benefit to the middle class as well as the poor. In addition, Murray's proposal will pay for these increases by closing wasteful tax loopholes both parties have proposed eliminating. The main difference is that the House Chairman of the Ways and Means Committee, Dave Camp (R-MI), proposes that all funding from his reforms of closing tax loopholes be used to help lower the tax rates, and other Republicans are adamant that all savings be used for deficit reduction.

However, if Republicans really want to burnish their credentials in support of anti-poverty programs and take a small step toward alleviating income inequality, "The 21st Century Worker Tax Cut Act" provides an excellent starting point for negotiation. Will they engage with it seriously? A key question is: How robust are they willing to let the EITC become and will they agree to pay for it by closing wasteful tax breaks?

NETWORK supports the elements of Senator Murray's bill, which would help struggling workers and their families, and begin the long trek toward greater income equality.