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The U.S. Tax Code Drags Millions of Childless Workers Into Poverty

Getty Images/Frederic J. Brown

The progressive nature of our tax code is supposed to help the poorest Americans, but it is actually doing the opposite for seven million childless workers. It’s dragging them into poverty.

The tax code has two main purposes: It raises revenue for the federal government and it gives back a significant amount of that revenue in the form of tax expenditures. Tax expenditures include provisions like the mortgage-interest deduction, the deduction for employer-sponsored health insurance, the earned-income tax credit (EITC), and the child tax credit. The Congressional Budget Office projects them to total $1.4 trillion in 2014—a huge amount compared to the $3 trillion in revenue the government will collect in total.

Some economists argue that this system doesn’t make any sense. The tax code should be for raising revenue, not spending money. In addition, the top 20 percent of earners collect more than half of the benefits from these expenditures, according to the CBO. But they are classified as part of the tax code, not as government spending. 

Tax expenditures by quintile
Congressional Budget Office

Switching to a system where the tax code’s sole purpose was to raise revenue and all spending was classified as such could make it harder for upper-income households to justify their opposition to higher taxes or less government spending. But that’s not happening anytime soon. Politicians have their favorite tax breaks. Americans dislike huge, disruptive changes. And, as a whole, low-income households benefit the most from tax expenditures as measured by the percent of their after-tax income:

After-tax expenditures
Congressional Budget Office

But there is one group that has been left behind: low-income, childless workers. Five economists at the Center for Budget and Policy Priorities examined Census Bureau data and found that the tax code pushed seven million childless adults either into poverty or deeper into poverty in 2012. The reason for this is the structure of the EITC. The EITC offers benefits to working, low-income adults. A working parent with two kids can collect more than $5,000 from the EITC. With three kids, it’s more $6,000. The Congressional Research Service (paywall) found that the EITC reduced the number of families in poverty by between 14 and 29 percent in 2012.

Childless workers, though, barely receive anything from the EITC. Their max benefits are less than $500 and begin phasing out at an income of $7,950. The CBPP economists calculated that a childless worker with income at the poverty line ($12,119 in 2013) would owe $927 in payroll taxes and $212 in income tax. They would receive just $169 from the EITC. Through those three features, the tax code pushed 1.2 million childless workers into poverty and another 5.8 million deeper into poverty in 2012.

There is bipartisan support for correcting this flaw. Senator Marco Rubio has proposed a comprehensive redesign of the government’s antipoverty system that, among other things, would convert the EITC (and a few other programs) into a similar program called a wage subsidy. The wage subsidy would be available equally to childless workers and working parents. However, Rubio’s plan is deficit neutral. That means any increased benefits for childless workers must come from working parents.

On the Democratic side, President Barack Obama and Senator Patty Murray each have their own proposals to expand the EITC without hurting working parents. They also keep their plans deficit neutral by closing various tax breaks (they differ on exactly which they would close). Under Obama’s plan, the CBPP calculates that a childless worker with earnings at the poverty line would see their EITC benefits increase fivefold.

Despite the bipartisan support, there is little hope that childless workers will receive help anytime soon. Democrats will not accept any plan like Rubio’s that helps childless workers at the expense of working parents. Meanwhile, Republicans oppose the spending offsets in Obama and Murray’s respective proposals. In the meantime, the tax code will continue to pull millions of childless workers into poverty.