with low earnings, and it phases out at 16 to 18 percent in the
upper part of the range. The phasein and phaseout percentages
thus are fairly close to one another.
But under the new proposal, the administration's proposal, the
positive credit rate is 34 to 40 percent. A 40 percent wage subsidy
for families with two or more children can be a very powerful work
incentive. At the same time, the phaseout range of the credit for
those in its upper range would be about the same as current law
and would be less than half the positive credit rate at the bottom.
In short, I think the administration's proposal is quite well de-
signed and should increase the work incentives in the earned in-
come credit while substantially reducing povertv and rewarding
work among those not working or working little, ii at all.
[The prepared statement follows:]
STATEMENT OF ROBERT GREENSTEIN
Center on Budget and Policy Priorities
I appreciate the invitation to testify here today. I am Robert Greenstein,
executive director of the Center on Budget and Policy Priorities.
The Center is a non-profit organization that conducts research and analysis on
public policies affecting low- and moderate-income families. Over the past 10 years,
we have worked extensively on issues related to the earned income credit and have
published numerous reports and analyses on the EITC.
The Center also coordinates a national EITC outreach effort that involves more
than 6,000 national, state, and local organizations and agencies and provides
information to working families on the EITC and the requirements for filing for it.
We work closely on this endeavor, now in its fifth year, with the Internal Revenue
Service, governors, mayors, the United Way and other charitable and religious
organizations, state human services agencies, and local service providers, businesses,
labor unions, and co mm uruty -based organization and advocacy groups.
My testimony here today concentrates on the EITC. It begins with a review of
conditions facing the working poor, followed by a discussion of recent improvements
in the EITC and the need for further reforms. The testimony then discusses the
Clinton Administration's EITC proposals as well as other EITC improvements that
Background: Increases in the Ranks of the Working Poor
Wages in the United States have been eroding since the 1970s and have
declined most sharply for low-skilled jobs. A Census Bureau study issued last May
found that the proportion of full-time, year-round workers paid wages too low to lift
a family of four to the poverty line has grown by half since 1979. In 1979, slightly
under 12 percent of full-time workers were paid wages this low. In 1990, some
18 percent of full-time workers â€” nearly one in five â€” were paid this little.
The downward trend in wages has coincided with increases in poverty rates
among working families. In 1979, the peak year of the economic recovery of the
1970s, some 7.7 percent of fanulies with children in which the family head works
lived below the poverty level. In 1989, the peak recovery year of the 1980s, some
9.8 percent of such families were poor. By 1991, the poverty rate among these
families rose further to 11.2 percent, meaning that one of every nine such families
was poor. The poverty rate among families with children in which the family head
works thus was nearly 50 percent higher in 1991 than in 1979.
These trends contrast sharply with the experience of the 1960s and 1970s.
During the 1960s, the percentage of workers who were poor fell considerably. In the
1970s, the percentage declined further, although at a slower pace.
These statistics may seem of limited relevance to those who assume that most
of the poor do not work. In fact, about 60 percent of all poor families â€” and nearly
two-thirds of all poor families with children â€” include a worker. In 1991, some
15 million people lived in families with children that contained a worker. A majority
of these families contained members employed for eight or more months of full-time
work during the year. Some 5.5 million people lived in working poor families with
children that contained a member employed full-time year-round.
Earnings data tell a similar story; they show that earnings are a very
significant source of income for poor families. In 1991, earnings accounted for
60 percent of the money income of poor two-parent families and 38 percent of the
money income of poor female-headed families. Among poor individuals under age
65 who live alone, earnings constituted 52 percent of income.
The working poor are a group that defies stereotypes. A solid majority of the
working poor are non-Hispanic whites. Most are between the ages of 25 and 64. The
working poor are especially prominent in rural areas, where they make up a larger
proportion of the population than in urban areas. Some 60 percent of the working
poor have completed high school. Among the working poor who are employed full-
time year-round, a majority are men, while women make up the majority of the part-
time working poor.
The downward trend in wages â€” and in the incomes of these working poor
families â€” is due predominantly to developments in the private economy, including
international competitive pressures. In some areas, however, government policy
appears to have played a role. The minimum wage has eroded substantially in
recent years. During the 1960s and 1970s, full-time, year-round work at the
minimum wage usually lifted a family of the three above the poverty line. In 1993,
full-time minimum wage earnings fall $2,700 â€” or 23 percent â€” below the estimated
three-person poverty line. The minimum wage is currently 22 percent below its
average level during the 1970s, after adjusting for inflation.
Sharp reductions in AFDC benefits for working poor families also have had an
effect. In nearly all states, AFDC benefit levels and income eligibility limits have
eroded substantially over the past two decades. In addition, changes in AFDC
enacted in the early 1980s eliminated eligibility for many working poor families. ^
A table in the Green Book published by this Committee tells an interesting
story. It shows that in 1972, a mother with two children who worked and earned
wages equal to 75 percent of the poverty line qualified for some AFDC assistance in
49 states. In 1980, such a mother was eligible for AFDC in 42 states. But in 1991, a
mother earning wages equaling 75 percent of the poverty line, about what full-time
minimum wage work now pays, qualified for AFDC in just five states.
It is true, of course, that the Earned Income Tax Credit was expanded
significantly during these years. Nevertheless, many working poor families who
used to qualify for AFDC lost more in AFDC benefits than they gained in EITC
payments. When wages, AFDC, food stamp, and EITC benefits are added together
â€” and federal income and payroll taxes are subtracted out â€” a mother with two
children who works and earns wages equal to 75 percent of the poverty line had
$3,000 less in disposable income in the average state in 1991 then she would have had
in 1972. Even if the EITC increases enacted in 1990 had been fully effective in 1991,
this mother still would have had $2,500 less in disposable income than in 1972.'
The Increase in Poverty Among Working Households is a Problem
This increase in the ranks of the working poor poses a significant problem. It
causes more poverty among children, a particular concern in light of a new study
suggesting that child poverty may adversely affect child intellectual development. In
addition, if full-time work fails to bring a worker and his or her femiily out of
poverty, the value and important of work may be diminished â€” and other ways of
obtaining resources, ranging from public assistance to minor hustling, may grow
more attractive. In short, rather than diminish the importance of work that pays low
wages, our society needs to promote work, stress its value, and show that those who
"play by the rules" and work hard will have at least a miriimally adequate standard
These problems are underscored by the large gap in child poverty between the
United States and our principal western European competitors. A study conducted
by a distinguished institutional research team has found that the child poverty rate in
the United States is about double the rate in Canada and four times the average in
Much of the preceding section is based on a forthcoming Center report.
Western Europe. This should cause particular concern, especially since those who are
children today will constitute the workforce of tomorrow.
The findings of this study are relevant for another reason, as well. When the
study's researchers attempted to discern the reasons for the much higher poverty
rates in the United States, they found that differences in work effort, race, and family
structure played only a small role. Work effort among those who were poor before
receipt of government benefits was similar here to the average in Western Europe.
Racial factors also did not explain these differences; poverty rates were significantly
higher just for non-Hispanic whites in the United States than for the entire
populations of Canada and the western European countries. Nor did differences in
family structure explain more than a modest share of the large differences in poverty
The researchers did, however, find one factor that accounted for most of the
difference in poverty rates. They discovered that the single most important factor
explaining the higher U. S. poverty rates was much weaker government benefit and
tax credit policies here. The poverty rate before taxes and government benefits was
about the same in the United States as the Western European average. But the
poverty rate after taxes and benefits was far greater here. Government income
support policies lift a much larger proportion of families out of poverty in Western
Europe and Canada than in the United States.
These findings present us with a critical challenge. We need to develop
policies that avoid the pitfalls of the current welfare system and that lift families out
of poverty while promoting rather than undercutting basic values of work and
The Earned Income Credit
The earned income tax credit is one such policy and is very different from
traditional welfare programs. In welfare, families without earnings receive the largest
benefits because they have the lowest incomes. Under the EITC, those without
earnings receive no benefits. Similarly, in welfare, benefits decline as earnings rise,
which can discourage work. Under the EITC, benefits increase as earnings rise for
families that earn small or modest amounts, thereby encouraging work. In addition,
in welfare, the eligibility rules are considerably more restrictive for two-parent
families than for single-parent fannilies. In the EITC, no such differential treatment
exists. For such reasons, the EITC is widely considered pro-work and pro-family and
has strong support across the political system, despite the absence of any lobby or
association of EITC beneficiaries or tax preparers working on its behalf.
Major progress has been made in recent years in improving the EITC, in no
small part due to the work of the Ways and Means Committee. EITC benefits have
been made significantly larger. Also, a differential in benefit levels has been
established between families with one child and families with two or more children.
This is a crucial step. Family expenses, the poverty line, and welfare benefits all rise
with family size. But wages do not. As a result, as the number of children in a low-
wage working family grows, the family is more likely to slip below the poverty line
(or to fail further below the poverty line). In addition, work becomes less
competitive with public assistance as family size grows. A family size adjustment in
the EITC can help to address these problems.
Another major EITC improvement was the overhaul and removal in 1990 of a
series of exceedingly complex, highly technical EITC rules that few families could
comprehend and the IRS could not eriforce and that consequently led to considerable
error. A diligent joint effort in 1990 by staff of this Committee, the Senate Finance
Committee, the IRS, and the Treasury Department resolved this problem and cleaned
up and greatly simplified the rules for qualifying for the EITC. In addition, the IRS
introduced a Schedule EIC, which fanailies now must complete and attach to their tax
retvu-n to receive the credit. Prior to the introduction of Schedule EIC in 1991, some
of the computations and data needed to determine EITC eligibility were found only
in taxpayer worksheets never sent to the IRS. Now that information appears on
Schedule EIC; this provides the IRS much more of the information needed to
determine EITC eligibility than it secured in the past. As a result of these steps, as
well as other measures the IRS has taken, program integrity has been greatly
Some Problems Still Remain
Some major problems remain, however. Further EITC reforms are needed.
The key problems include:
â€¢ EITC benefits still are much too low to lift full-time working fanulies to
the poverty line. A family of four with full-time minimum wage
earnings will be $5,100 below the poverty line in 1993 when its wages and
EITC benefits are counted and its payroll taxes are subtracted. Even if
the family receives food stamp benefits and these benefits are counted
as income, the family remains $2,000 below the poverty line.
â€¢ Two EITC supplemental credits that were written into the tax code in
1990 have created major new complexities and added potential for error
and abuse; they serve little purpose. I am referring to the EITC health
insurance credit and EITC young child supplement. The health
insurance credit was the subject of a hearing just last month by the
Oversight Subcommittee of this Committee. A Subcoirunittee
investigation found evidence of abuse by ii^urance agents and
companies. The Ways and Means Committee and the full House have
twice voted to repeal these two supplemental credits and plow the
savings back into enlargement of the basic EITC. That would be a wise
course of action.
â€¢ The "advance payment" mechanism under which eligible families can
receive EITC benefits throughout the year in their paychecks does not
function effectively. Few EITC families receive their benefits in this
â€¢ While EITC participation has risen in recent years, some eligible families
still do not receive the credit. The IRS has substantially enhanced its
outreach and public information efforts on the EITC and is to be
conmiended for this work. But some further steps can be taken.
â€¢ One of the initial purposes of the EITC was to offset the regressive
burden of the payroll tax on low-income working families with children.
But for very poor workers without children, there is no offset to the
The Clinton Administration EITC Proposals
In his State of the Union address on February 17, President Clinton made an
important announcement. He declared his strong support for the goal that full-time
working families with children should not be poor and emphasized the critical role of
the EITC in meeting this goal. He stated:
"The new direction I propose will make this solemn, simple
commitment: by expanding the refundable earned income tax credit, we
will make history; 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."
The Administration's budget document, A Vision of Change for America,
provides some additional iriformation, noting that the Administration's EITC
proposal "will assure that a family of four will not be forced to live in poverty, if one
of the parent works full-time at a minimum wage job." This implies that the EITC
benefit increment for families with two or more children will be substantially
While the details of the Administration's final EITC proposal are not yet
available (I hope they are released at this hearing), these statements provide some
strong clues of what the proposal will look like. It apparently will involve a
sufficient increase in the EITC to bring families of four with a full-time minimum
wage worker to the poverty line, if the family has a child. That would be an
outstanding achievement. I commend the Admirustration for it.
Bringing families of four with a full-time worker to the poverty line should
encourage work and underscore its value even when the work pays a low wage.
Such a step would be crucial to making welfare reform more effective. As the
Manpower Demonstration Research Corporation, the organization that has evaluated
numerous welfare-to-work programs, has reported, even successful welfare
employment programs do relatively little to reduce poverty or raise family income
because families typically lose nearly as much in welfare and other benefits as they
gain in earnings from a low-wage job. MDRC has indicated that policy changes in
other areas such as the EITC are needed if work is to raise family income and enable
welfare recipients to escape poverty by working.
An EITC expansion of this natiire would also have a significant effect in
reducing poverty, especially among children. CBO data tabulations published in the
Green Book show that when the EITC expansions enacted in 1990 are phased in fully,
they will lift one million cfiildren out of poverty. The new EITC expansions
proposed by the Clinton Administration are likely to lift many more children from
the ranks of the poor.
Two other features included in the Administrahon's original EITC design that
was subsequently pulled back and modified â€” and that I hope remain in the final
Admirustration proposal â€” also warrant discussion. The original plan would have
repealed the EITC health insurance credit and the EITC young child supplement and
used the funds to help firiance the expansion in basic EITC benefits. Such an
approach would represent sound policy. Since this Committee has already approved
such an approach twice in the past, I will not discuss it at further length here.
In addition, the original Administration plan would have established a new,
small EITC for childless workers with income below $9,000. That credit would have
equaled 7.65 percent of their first $4,000 in earnings.
The establishment of such a credit would represent wise policy. In seeking to
encourage work, the last thing we should be doing is taxing the working poor deeper
into poverty. Tliis applies to poor workers without children as well as those with
chilcGren in the home.
Currently, the EITC provides low-income working parents with an offset to the
regressive payroll taxes they pay. Poor workers without children qualify for no such
offset, however, because they are ineligible for the EITC; payroll taxes do push them
deeper into poverty. Moreover, single tax filers start to owe federal income tax on
their eanungs when those earrungs are more than $1,000 below the poverty line. An
EITC proposal such as that in the Administration's original plan would address both
of these problems, offsetting the payroll tax and raising the point at which income
taxes begin being owed so that this point is about at the poverty line.
Such a proposal would also have another beneficial effect. It would shield
these very poor workers from having their poverty deepened by the proposed energy
Of course, the proposal to extend the EITC to workers without children should
not be confused with the proposal to expand the EITC for families that do have
children. Under the original Admirustration proposal, the new EITC for workers
without children was very small, providing a maximum benefit of $306 and an
average benefit of between $100 and $200 â€” a small fraction of the EITC benefits for
families with children. The proposal for childless workers was best understood as a
proposal to shield very poor workers without children from taxation, rather than as a
proposal to raise their living standards or lift them out of poverty, as would be done
for families with children.
Additional EITC Reforms Could be Considered
Based on what I know to date about the Admiriistration's EITC proposal, I
would urge favorable corisideration of it. I hope to be able to comment further on
the proposal at the hearing if additional details about it become available during the
In addition to the various changes in EITC benefit rules and eligibility criteria
that the Administration is proposing, several other modest EITC reforms could also
be considered. These reforms are designed to make progress on two other fronts â€”
increasing the proportion of eligible families that receive the credit and improving the
functioning of the EITC advance payment mechanism so that more families receive
their EITC benefits in their regular paychecks.
Regarding steps that could be taken to increase receipt of the EITC by eligible
households, I would suggest three modest steps. Two of these three steps would
require legislation. The three recommendahons, which grow out of the Center's EITC
public information efforts, are as follows:
â€¢ Under current law, employers are required to provide an IRS-designed
notice about the EITC to workers whose wages were so low that they
had no income tax withheld from their paychecks during the year. The
notice is distributed around the time that W-2 forms are distributed.
This requirement was enacted in 1986 at a time when all that an eligible
family had to do to obtain the EIC was to file a tax return. The
provision targeted workers who had no income tax withheld because
they are less likely than other ElC-eligible families to file a tax return.
Since the time when the current notification provision was enacted,
however, the requirement to file Schedule EIC has been added. We
suggest the notification requirement be broadened so that the notice is
provided to all workers with gross wages below the EITC income limits.
We also reconunend that IRS modify the wording of the notice to
explain the need to file Schedule EIC as well as the requirement to file a
â€¢ Our second suggestion would resolve a technical problem in legislation
passed last summer and would better enable states to inform
unemployed workers about the EIC. Early last year, several states
concluded that the most effective way to get information about the EITC
to workers who received some unemployment insurance benefits during
the year was to include an EIC notice with the 1099-G forms that are
sent each January, (The 1099-G form shows the total amount of
unemployment benefits an individual received in the previous year.)
But under the law as it stood in early 1992, a state that included non-
germane information in an unemployment insurance-related mailing
was required to reimburse the Labor Department for half the mailing
cost, even if the added information did not raise the cost of postage.
A modification to this rule â€” permitting states to send EIC information
at no charge with 1099-G forms so long as it did not raise the cost of
postage â€” was included in unemployment legislation enacted last July.
But, as it turned out, some states send their 1099-G forms in so called
"self-mailers" and cannot enclose additional paper with such mailings.
For these states, the next most efficient way to tell unemployed workers
about the EIC is to include an EIC notice with a monthly unemployment
check. Unfortunately, the legislation enacted in July did not apply to
the mailing of unemployment checks; it only covered 1099-G mailings.
This occurred because the problem with 1099-G self-mailers was not
understood at the time. Therefore, we suggest that the legislation
be modified to allow states to send EIC information with any
unemployment insurance-related mailing, including monthly
unemployment checks, so long as it does not raise the cost of postage.
A third suggestion could be implemented administratively. IRS could
consider establishing a toll-free hotline to help callers locate their nearest
VITA site. (VITA sites are established by IRS and staffed by trained
volunteers who offer free tax assistance to low-income filers.) This
hotline would be separate from the regular IRS hotline.
Currently, taxpayers who want to find the location of their nearest VITA