New Tax Credit Research Challenges Republican Proposals

By Carrie Welton

As Congress continues to debate tax reform, a new report from MDRC’s Paycheck Plus pilot program provides additional evidence that the Earned Income Tax Credit (EITC) promotes work. Presently, workers who have dependent children receive a significant boost from the EITC. However, the credit for low-income adults without dependent children is just $506—too small to even offset their federal income taxes – let alone their payroll taxes. These workers include non-custodial parents, parents with grown children, and childless adults. MDRC’s Paycheck Plus program simulates the federal EITC by providing up to an additional $2,000 credit per year to adult workers without dependent children. 

The EITC for families with children significantly strengthens employment and earnings. Paycheck Plus was designed to test whether an EITC for childless adults would have the same effects. The early findings show Paycheck Plus increased participants’ total income in 2015 and 2016. It also increased child support payments in 2015. Lastly, Paycheck Plus increased employment for most participants in 2015. These findings suggest that an expanded EITC for working adults without dependent children could lead to increased income and employment. 

For decades, regressive tax policy has allowed the wealthiest individuals to claim the benefits of increased productivity while middle-class income has stagnated. This has resulted in deepening income and wealth inequality, especially for people of color. Inequality in the U.S. has reached levels not seen since the Great Depression and can lead to significant social costs that stifle economic growth. In 2016, the top 1 percent of households raked in more federal tax benefits, promoting things like home ownership and college savings, than the bottom 80 percent of all taxpayers combined. At the same time, over 7 million workers without dependent children are taxed into (or deeper into) poverty. 

Current tax proposals from Republican leadership would only make things worse. Among the world’s 22 most wealthy nations, the U.S. ranks last in leveraging taxes and transfers to alleviate inequality. Despite this, Republican proposals would sacrifice critical revenue to subsidize more benefits for the wealthy. These benefits do not “trickle down.” In fact, economic research shows that increasing income for lower earners generates more economic growth than the same increase for higher earners.

The EITC is one of the best examples of how tax policy can improve the lives of workers and their families. Refundable tax credits, like the EITC, are the only tax subsidies that aren’t overwhelmingly skewed to benefit top earners. Current tax proposals would take us in the wrong direction, providing little benefit to low-income workers while depriving our government of needed revenue. We urge Congress to reject these misguided proposals.