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Considerations in Efforts to Restructure Work-Based Credits

Steve Holt, Elaine Maag

Published: November 09, 2009
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The text below is an excerpt from the complete document. Read the full report in PDF format.


Abstract

The Internal Revenue Code has replaced traditional means-tested programs as the principal means for transferring income to low earners. The largest vehicle is the Earned Income Tax Credit (EITC), now supplemented by both the Child Tax Credit (CTC) and the Making Work Pay tax credit (MWP).

This paper looks at the system's evolution, the important role played by the tax system in assisting low earners, and the complexities presented by the current approach. It offers principles to guide the design of a worker credit and child benefit that would replace the EITC, CTC, and MWP, along with a specific proposal.


Introduction

Historically, the primary role of the Internal Revenue Code has been to raise revenue for the federal government. Yet the nation's tax system also functions to encourage behaviors such as saving, working, owning a home, and supporting children. In recent decades, the Code has also replaced traditional means-tested spending programs as the principal means for transferring income to low-earning individuals and families with children, particularly through the use of refundable credits. The oldest and largest vehicle is the Earned Income Tax Credit (EITC), and it is now supplemented by both the Child Tax Credit (CTC) and the Making Work Pay tax credit (MWP).

In character with much of the tax code, the income support features are provisions with complicated and sometimes contradictory rules that lack overall coordination. Several benefits accrue to households with children, while low-earning workers without children at home receive relatively little attention. Credits phase in and out at different rates and income levels, complicating the incentive structures without considering interactions among policies targeting often overlapping populations. Recent initiatives tend to extend the patchwork, rather than rationalize the system. Beginning with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and extending through the American Recovery and Reinvestment Act (ARRA), recent initiatives have been implemented temporarily, adding another source of complexity.

(End of excerpt. The entire report is available in PDF format.)