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The partisan divide over the Earned Income Tax Credit

Obama’s new budget bolsters the Earned Income Tax Credit, the largest and most successful government assistance program for the working poor.
Brenda Dozier at the North Carolina Taxpayer Assistance Center in Durham, N.C.
Brenda Dozier, a payroll specialist who said her sister has relied on refund anticipation loans, works at the North Carolina Taxpayer Assistance Center in Durham, N.C., April 13, 2012. The earned income tax credit puts billions of dollars into mailboxes and bank accounts of low-income working Americans.

President Obama’s new budget increases spending on and expands eligibility for the Earned Income Tax Credit, the largest and most successful government assistance program for the working poor.

The much-praised House GOP tax reform introduced last week would cut the EITC, even though a House GOP report excoriating most federal assistance to the poor singled out the program for applause.

This new partisan difference over the EITC -- a program that in the past has been a rare source of bipartisan agreement -- speaks volumes about Republicans’ newfound ambivalence toward the working poor.

The EITC was created back in 1975 by Sen. Russell Long, who--despite being the son of populist Louisiana Gov. Huey “Every Man A King” Long -- was fairly conservative. The idea was to use government assistance to reward work rather than indolence among the poor; you only got the money if you could show that you had worked.

This conceit had obvious appeal to President Ronald Reagan, who expanded the program, and later to President Bill Clinton, who expanded it much further even as he eliminated “welfare as we know it,” i.e., long-term, no-strings cash assistance to the poor. (The EITC was further expanded under Presidents George W. Bush and Barack Obama.)

Welfare reform should have ended the partisan scrimmage over welfare dependency. Instead, it merely shifted the goalposts. Previously, the GOP had praised the “deserving” (i.e., working) poor even as it derided the “dependent” (i.e., welfare-collecting) poor. But with Clinton’s abolition of long-term assistance and imposition of work requirements, it became more difficult to isolate a class of nonworking, government-dependent poor that Republicans could reliably scapegoat. So they gradually came to rebrand as “dependent” any low-income person who collected government assistance, even if that person also had a job. In effect, conservatives broadened their definition of “welfare” to the breaking point, including food stamps (most of which go to people with jobs), Medicaid (a benefit you collect only if you get sick), and even Pell Grants.

The EITC wasn’t targeted explicitly. But it ran afoul of a growing doctrine put forth by then-Rep. Jim DeMint, R.-S.C., and the Wall Street Journal editorial page, that said too many lower-income people were getting away with paying no income tax. The theory was that too many of them were getting too used to the idea that government was all benefit and no cost (a formulation that overlooked the many regressive state, local, and federal payroll taxes already being paid by the poor). House Budget Committee Chairman Paul Ryan and House Majority Leader Eric Cantor cautiously signed on -- the usual code phrase was “broaden the base”—before a version of this construct (“the 47%”) helped blow up Mitt Romney’s 2012 presidential campaign. An interesting debate ensued on the right, with no particular resolution about whether conservatives should boast about inventing the EITC or quietly favor its demise.

House Ways and Means Committee Chairman Dave Camp’s tax reform reflects that ambivalence. Camp would in effect replace the EITC with a payroll-tax exemption up to $4,000 and impose various restrictions. A Ways and Means Committee document argues that this would eliminate fraudulent or erroneous claims, and, because it’s simpler, might be used by some people currently put off by the EITC’s complexity.

The committee document also says that “exempting a portion of wages from payroll tax would represent a tax cut, whereas the current EITC constitutes government spending.”

Really? To me, both alternatives look like tax breaks. At any rate, such hair-splitting over definitional formalities can be of interest only to highly partisan Republicans.

The trouble with Camp’s EITC proposal is that, by the reckoning of the Joint Committee on Taxation, it would cut this highly-regarded program by $217 billion over the next decade. Robert Greenstein, chairman of the Center on Budget and Policy Priorities, a Washington nonprofit, calculates that a mother with two children working full-time at the minimum wage would lose roughly $2,000 per year once the change went fully into effect.

The president’s new budget goes in precisely the opposite direction, increasing the EITC by about $60 billion over the next decade. It would do this by easing eligibility and expanding benefits for childless workers to receive the benefit, which today is reserved mostly for custodial parents. Childless workers today must be 25 or older to receive the credit; that threshold would be reduced to 21. Childless recipients of the EITC today receive a maximum tax credit of $500; that would be doubled to $1,000. Also, the maximum-income eligibility limit for childless recipients would be raised from about $15,000 to about $18,000. According to the White House, this would increase the EITC benefit for a currently-eligible single person working 35 hours per week at minimum wage from $161 to $823.

The expansion’s $60 billion cost would be paid for by closing two notoriously inequitable business loopholes: one, for “carried interest,” that allows hedge fund and private-equity managers to define much of their income as capital gains, thereby lowering the rate at which it’s taxed; and another, for S-corporations, that allows self-employed individuals to avoid paying Social Security and Medicare taxes.

The GOP tax plan, much to Camp’s credit, already proposes eliminating both these loopholes. But rather than using the savings to lower marginal tax rates, some of them on very high incomes, and reduce their number, the White House plan would use the money to help the working poor. That encapsulates as well as anything the current difference between prevailing Democratic and Republican notions of reform.