Tax Credit Aims to Lift Families Out of Poverty

A little noticed feature of President Clinton’s economic program would lift all working families with children above the poverty level for the first time in American history, Administration officials say.

Some tax experts on Friday disputed the contention. But there is no doubt that the Clinton Administration’s plan to expand the Earned Income Tax Credit would result in a big boost to the working poor.

The program distributes benefits to almost 14 million families earning less than $22,370 annually by way of credits on federal income taxes. The benefits cost the government $10.7 billion in 1992.

Clinton’s proposal would revise the formula used to calculate the credit, raising the maximum benefit and extending eligibility to families with one child earning up to $28,500 and families with two children earning up to $30,000. The additional cost to the government over four years of an expanded program would be $19.9 billion.

“We will reward the work of millions of working poor Americans by realizing the principle that if you work 40 hours a week and you’ve got a child in the house, you will no longer be in poverty,” Clinton said in his address to a joint session of Congress on Wednesday. He echoed that promise at a town meeting in Chillicothe, Ohio, on Friday.

The plan, while costly, is likely to appeal to many lawmakers. Unlike many aid programs for the poor, the earned income credit has proved popular with conservatives as well as liberals because it rewards people who work.

But tax analysts said that while the credits would ease the burden of energy taxes the Administration is proposing and help the working poor, they were skeptical that it would sufficiently boost the income of all families enough to raise them above the poverty level.

“I question whether it does achieve that goal of lifting all families with one family member working full time out of poverty,” said Isaac Shapiro, a senior researcher at the Center on Budget and Policy Priorities.

With one worker earning a minimum wage of $8,840, the $2,400 maximum benefit falls far short of lifting a family of four above the official federal poverty level of $15,171, he said.

But Treasury officials said the program has the impact Clinton promises, when combined with other government assistant programs like food stamps.

If the Administration’s proposal is approved by Congress, a family of four with one income of $10,000 will receive $2,400 from the earned income tax credit in 1994. In 1993, under the old laws, that family would have received $1,511. A family with one child and an annual income of $24,000, who received nothing under the old law, would received $518 under the Clinton proposal.

The Administration’s proposal also fulfills a Clinton campaign promise to help part-time workers. A family with two children earning just $4,000 would receive $1,600 under the proposal, twice as much as it receives under the current law, Treasury officials said.

The intent of the proposal, Administration officials said, is to help the poorest working families and help lower middle-class families by helping them offset the proposed energy taxes.

The credit functions like a negative income tax for most recipients, whose earnings are so low that they have no federal tax liability and who receive the credit in the form of a cash payment from the government. For those who have some tax liability at the end of the year, the credit reduces their tax payment dollar for dollar.

Dan Mitchell, an analyst for the conservative Heritage Foundation, criticized Clinton as “dishonest” in trying to sell the credit as a tax break when most of the money involved is really a straight spending increase for the government.

“If you look at the existing earned income tax credits, 89% is government outlay,” he said.

He said nonetheless that Republicans were likely to continue supporting the credit because it rewards people for working, even in low paying jobs.

“EITC has the virtue of giving you money because you work,” Mitchell said. “It is generally better than welfare, because it’s tied to working. Welfare, on the other hand, encourages bad behavior, like not working.”

Shapiro said that he feared that Republicans would try to derail the proposal because it is so expensive.

Shapiro said the President could achieve his goal of lifting all working families out of poverty with the same money by slightly redesigning the credit to give more to the very poor and less to those with moderate incomes.

Although almost 14 million people claimed some benefits from the earned income tax credits last year, hundreds of thousands more who were eligible did not apply, especially the poorest of those who qualify. People who earn under a certain amount, $15,200 for a family of four, are not required to file taxes because they have no tax liability, and many of those people do not know they are eligible for the credit if they file.