Alleviating Poverty through the IRS? One Policy Shows it's Possible

What is the role of the federal government in alleviating poverty? Sure, there are welfare programs such as the Temporary Assistance for Needy Families (TANF), but is there a deeper social safety net that the U.S. government can or should develop? Should there even be a safety net at all?

Any safety net or initiative to address poverty undoubtedly will affect how we levy and collect taxes. Taxes and welfare are not necessarily two topics that encourage civil discussion, but the acceleration of income inequality under President Obama—a president who has made addressing inequality a centerpiece of his presidency—should nudge Congress towards action that ultimately benefits those sliding below the poverty line through incentives to participate in the workforce.

Still, Congress meeting to debate taxes certainly can cause anxiety. After all, as humorist Will Rogers said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” Tax credits can and do allow many people to keep more of their earned income in their own pockets. However, the debate over the rate, amount, and demographic has divided policy makers for decades.

One policy that has created more unity than division is the Earned Income Tax Credit (EITC). A tax policy with broad bipartisan support may seem like an extinct idea to those serving and observing the 113th Congress, but since 1975 the EITC has been a reliable—if little known—instrument of poverty alleviation. Originally trumpeted by the Ford administration and the Democratically controlled Congress, the initiative has had a long and successful life span as subsequent iterations and adjustments to the policy have been approved by both parties.

Why has this piece of legislation that has drawn Republicans and Democrats together for nearly 40 years, and what are the current and future public justice implications?

The Internal Revenue Services (IRS) describes the EITC as a “refundable federal income tax credit for low to moderate income working individuals and families.” This is may be a sufficient legal definition for the IRS, but what does the EITC do and who can benefit from it? New York University Law professor David Kamin asserted that the EITC keeps more than 2 million Americans out of poverty every year and has been the single most effective anti-poverty tool originating from Congress. The Center on Budget and Policy Priorities (CBPP) says the initiative “reduces the tax burden on workers supplements wages, makes work more attractive than welfare, reduces income inequality and helps low-income families build assets.”

But of course there is a cost. The Economist estimated the program costs $30 billion per year, making it the largest federal policy targeting the poor. The National Bureau of Economic Research, however, says the cost is offset “by a reduction in the number of single mothers receiving welfare” as the largest group of recipients is single mothers in their early 30s who possess a high school diploma. Thus, the logic is that giving poorer individuals earning income a tax credit will help fewer to rely on other forms of federal assistance. But data on individuals who participate in multiple programs is scarce; figuring out whether or not individuals are gaming the system is as challenging as determining basic assessments on welfare thresholds.  

As a negative income tax measure, the EITC should serve as a model for future efforts to reform the social safety net in America because it satisfies the following welfare implications as developed by The Center for Public Justice.

1) Public welfare assistance must not substitute for, but rather supplement and be coordinated with, help rendered by family, relatives, neighbors, and co-workers.

As has been described, the EITC encourages work by supplementing existing income.

2) Welfare should be designed as temporary assistance, not as long-term income maintenance.

The EITC is temporary in that its phasing out begins once recipients reach a certain income threshold. The Economist uses the example of a single mother with one child being phased out once her annual income reaches $17,500.

3) The financial assistance and services provided to individuals and families should be generous and effective, not stingy and second-rate.

While the amounts vary based on one’s family size, the EITC financial assistance is one of the more substantial poverty alleviation instruments at the disposal of not only the federal government but state government’s as well.

4) The design, funding, and delivery of welfare should be decentralized, with a national floor, to maximize the match between the pattern of needs in various localities and the resources of government and nongovernment organizations (NGOs) in those places.

The EITC is not purely a federal program. Without the requisite space to outline the full range of state programs, it is simply worth acknowledging that all 50 states have their own variation of welfare-tax systems in place.

The question, however, remains: Should the government be involved in designing social safety nets at all? New data shows that the falling unemployment rate—currently 7.3 percent—is not necessarily due to increased hiring. Rather, it is largely attributed to the fact that only 63.2 percent of working-age Americans are in the labor force or are looking for employment, the lowest level since 1978. Proponents of the EITC point to the policy’s incentivizing work while acknowledging certain loopholes for individuals that do not meet specific requirements. The Tax Policy Center, for example, cites a Government Accountability Office report that estimates 75 percent of households eligible for the tax credit actually claim it; a participation rate that oscillates depending on the size of the family.

Within the economic development community, taxation is actually considered essential for sustainable economic and social development, as well as poverty reduction. It is probable that most do not equate taxation with sustainable economic and social development, but should we start to do so? It would seem that if the federal government’s tax code is meant to be a social safety net it cannot be treated as the first line of defense against poverty.

As Congress returns from its month-long recess it faces difficult decisions on Syria, the debt ceiling, and passing a budget. Whether one believes the social safety net needs repair or removal, a civil debate among policymakers on the economic standing of America’s most vulnerable is necessary. We elected these fine men and women to invite policy challenges - not ignore them.

  -Jeremy Taylor is pursuing a PhD in organizational leadership and currently serves as a senior consultant to the federal government. He is the founder of a community forum known as Coffee & Currents that provides a welcoming environment for discussing society’s vexing questions. You can follow him on Twitter @jerdavtay.