A Glimmer Of SOTU Compromise? Expanding The Earned Income Tax Credit

Republicans will grimace as President Obama unveils his massive tax hikes in tomorrow’s State of the Union address, however, one policy will receive bi-partisan applause: expanding the Earned Income Tax Credit (EITC).

Enacted by Republican Gerald Ford in 1975, enlarged by Ronald Reagan in 1986 and today endorsed by the likes of Paul Ryan, GOP tax and budgeting wunderkid, both sides of the aisle want an EITC increase to better fight poverty. EITC boils down this: if you tax something you get less of it, and if you subsidize something you get more of it. In this case, it’s a tax credit for low-income workers that subsidizes their work. It’s a much better solution than, say, spiking the minimum wage, a de facto tax on labor that discourages hiring low-skilled workers.

Richard V. Reeves and Joanna Venator at Brookings point out that in 2012 the EITC pulled 6.5 million people out of poverty, including some 3.3 million children. As the National Bureau of Economic Research reports: “This largest federal cash transfer program also successfully meets its explicit goal of encouraging low-income parents to go to work by, in effect, lowering their tax rate and providing a financial bonus for that work effort. It has been especially effective in encouraging single parents, particularly women, to obtain employment.”

NBER also reports on a study that found 60 percent of the 8.7 percentage point increase in annual employment of single mothers between 1984 and 1996 was due to EITC expansion. And, even more encouraging, there was no indication that EITC triggered a reduction in hours for existing workers. Another benefit to the EITC, besides helping families better control their financial future through work, is that its cost is somewhat offset by a decline in the number of single mothers on traditional welfare programs.

Reports indicate that President Obama plans to propose doubling this deduction for childless workers, partially in hopes of attracting more young men to the workforce. Brookings graphically displays both Ryan and President Obama’s proposals for expansion, compared to current policy.

Data from the Tax Policy Center also shows the benefits of expanding the EITC to earners without children would overwhelmingly benefit the lowest income bracket.

President Obama and Ryan unsurprisingly have different approaches to paying for the expansion; Ryan wants to trim spending, Obama to raise taxes. Tomorrow night will set the stage for negotiations on this issue; here’s hoping the tribes won’t devolve into partisan brinksmanship.