earners escape^poverty because they live in households where there is another
wage-earner.'^
As shown in Figure 1, at least 60 percent of today's children have mothers in
the work force, and one in five children live in poverty. The poverty rate for
single women in the labor force who maintain families was 17.4 percent in 1990.
This rises to 89 percent for a family headed by a female high school drop-out who
is not in the labor force (Table 2). TJTC helps to reduce the feminization of
poverty in two ways. First, it can make a difference between having a job and not
having one for a female head of family who is actively looking for work. Second,
by increasing job opportunities, it can help draw female heads who are not in the
labor force into the job market, where they will be eligible for the earned income
tax credit and may be able to leave the welfare rolls.
Finally, since AFDC and general assistance recipients are target groups, TJTC
has a direct impact on employment of those on welfare. In 1989, more than 99,000
AFDC recipients found jobs through TJTC. Twice that number were vouchered, that
is, certified as TJTC-eligible to prospective employers. The data are recorded in
Table 3.
Mr. Chairman, this concludes my testimony. Are there any questions?
2-3, 12-14; Hispanic Policy Development Project, Too Late To Patch. 1988. GAO,
- "^52,1 '
206
Footnotes
1. Employment and Training Reporter, October 10, 1990, p. 113.
2. McKinley L. Blackburn, David E. Bloom, and Richard B. Freeman, "An Era of
Falling Earnings and Rising Inequality?", The Brookings Review. Winter
1990/1991, pp. 38-43.
3. Testimony of David Elwood before Subcommittee on Human Resources, Committee on
Ways and Means, February 28, 1989.
4. Manpower Development Corporation, America's Shame's. America's Hope. 1988, pp.
2-3, 12-14; Hispanic Policy Development " . ™ ^ . .««« „.„
The Urban Underclass . GGD 90-52, p.6.
5. ASTD, Workforce Basics: The Skills Employers Want . 1988, p. 7.
6. Lisa M. Lynch, Private Sector Training and Its Impact on the Earnings of Young
Workers. Working Paper No. 2872, National Bureau of Economic Research, March
1989, p. 13.
7. Macro Systems, Impact Study of the Implementation and Use of the Targeted Jobs
Tax Credit Program, Overview and Summary, July 1986, pp. 111-3,4.
8. Children's Defense Fund, Vanishing Dreams. p.lX; Business Week. June 15, 1987,
p. 22. William T. Grant Foundation, The Forgotten Half, p.2.
9. Testimony of Glen Schneider, Senior Associate, Abt Associates Inc., before the
Senate Committee on Labor and Human Resources, June 8. 1988.
10. Sheldon Danziger and Peter Gottschalk, "Work, Poverty, and the Working Poor: A
Multifaceted Problem," Monthly Labor Review. September, 1986.
11. Ibid.
12. Thomas Nordone, "Decline in Youth Population Does Not Lead to Lower Jobless
Rates", Monthly Labor Review . June, 1987, p. 37.
13. Ibid., pp. 39-41.
14. Danziger and Gottschalk, qjl ciL, p. 21.
15. Jennifer M. Gardner and Diane E. Herz, "Working and Poor in 1990", Monthly
Labor Review. December 1992, p. 23.
207
FIGURE 1. Most of today'is children have mothers in the workforce
^^^^^ Age 6-13
r^~-va Birth to age 5
YEAR
fqpi^^^s: Bureau of Labor Statistics, "BLS News," August 12,
-ys/, and unpublished data.
Taken from Raising America's Childr^^n- How ShnnM W^ r^r>., by Sar A. Uvitan and
Elizabeth A. Conway, George Washington University. 1988. p.3.
208
Table 2
THE POVERTY GULF
Poverty rates of families whose head of household
is younger than 25 (1989)
Married couple, attended college, no children
h6%
Married couple, high school granduate, with one or more children
■■§■12%
Married couple, high school drop-out, with one or more children
Female-headed family, high school drop-out, with one or more
children
89%
Source: Bureau of Census
Source: The New York Times. March 4, 1991
209
Table 3
TJTC Vouchers and Certifications, 1988-1989
Vouchers
Certifications
1999
1999
1999
1999
Summer youth, 16-18
27,105
24,634
17,769
17,450
Youth
405,833
316,238
282,640
230,998
Veterans
31,856
26,403
16,366
14,570
Ex-offer>ders
58,919
69,802
22,404
24,745
Handicapped
70,058
75,342
36,619
40,652
SSI
8,251
11,641
5,994
7,433
AFDC
203,754
198,005
97,278
99,127
TOTAL
842,436
755,330
497,312
452,453
210
Table 4. Age Distribution of
Certifications, 1988 and 1989
(In Percent)
12SS 12S2
Age 16-18 15.0 15.4
Age 19-24 57.5 51.6
Age 25-34 17.5 19.6
Age 35+ 10.0 12.4
Source: U.S. Department of Labor
211
Table 5. Number of TJTC Workers, by
Wages Earned, 1988 and 1989
1988 1989
Under Minimum 14,914 10,792
Minimum to $3.99 269,224 192,762
$4 to $4.99 135,791 144,987
$5 to $5.99 53,535 56,752
Over $6 45,725 46,172
NOTE: Totals do not agree with Table 3, as wage information
is from a separate data base.
Source: U.S. Department of Labor
212
Table 6. Number of TJTC Workers by
Occupation, 1988 and 1989
1988 1989
Professional and technical
12,612
10,717
Clerical
166,138
151,749
Services
214,480
195,438
Farming and Fishing
4,562
3,901
Processing
19,175
13,678
Machine Trades
15,503
10,330
Bench Work
27,369
19,633
Structural
12,731
10,522
Miscellaneous
47,429
43,727
NOTE: Totals do not agree with Table 3, as occupational
information is from a separate data base.
Source: U.S. Department of Labor
213
Testinony of
NANCY HOHR KENNEDY
CHIEF OF STAFF
UNITED WAY OF AMERICA
hearing on
Selected Aspects of Welfare Reform
before
The Subcommittee on Select Revenue Measures
and
The Subcommittee on Human Resources
Committee on Ways and Means
U.S. House of Representatives
The Honorable Charles B. Rangel , Chairman
The Honorable Robert T. Hatsui , Acting Chairman
Tuesday, March 30, 1993
Chairman Rangel, Chairman Hatsui, and Members of the Subcommittees
on Select Revenues Measures and Human Resources, my name is Nancy
Mohr Kennedy. I am Chief of Staff of United Way of America (UWA).
Thank you for the opportunity to appear here today in support of
the Earned Income Tax Credit (EITC) as a means to provide work
incentives for low-income families and help create alternatives to
welfare.
United Way of America, along with local United Ways located across
the country, support efforts to reform the nation's welfare systom.
Our shared goal is to create a compassionate, rational system to
assist individuals and families in their quest for self-
sufficiency.
Recently, United Way of America's Public Policy Committee met and
reaffirmed it's commitment to work toward overcoming welfare
dependency, as well as removing barriers to independence and self-
sufficiency. Toward that end, our testimony focuses on the
importance of the Earned Income Tax Credit in achieving those
goals.
The EITC is a refundable tax credit from the IRS to working
families earning less than $22,370 with at least one child living
with them, and is a worthwhile tax credit that helps strengthen and
stabilize the American family by helping put food on the table and
pay the bills. It is an important economic development effort
because most benefits are spent locally, infusing over $11 billion
into state and local economies. The money is spent to pay bills,
purchase food, and cover other family necessities.
Originally enacted in 1976, the Earned Income Tax Credit wiis
greatly expanded in 1990 by President Bush and the Congress to
reward and encourage work and also to help offset the growing
burden that payroll taxes place on low-income working families.
Almost 14 million families now qualify for the credit, which
provides $10.7 billion annually in benefits to low-income working
families.
The EITC provides a dollar-f or-dollar reduction in the taxes an
eligible family owes to the Federal Government. Unlike most tax
credits, the EITC is refundable. If the amount of the credit
exceeds the taxpayer's tax liability, the balance is payable to the
taxpayer. Therefore, families with very low incomes and who may
not owe any taxes can receive at least a partial credit.
214
AcUiitionally , under an advance payment system, eliyibJo tiixpayoi f-
may elect to receive the benefit of the credit in their periodic
paychecks, rather than waiting to claim a refund on their return
filed by April 15 of the following year.
As a result of changes in the law in 1991, thoso taxpayers who
receive public assistance can still receive the credit without risk
of losing those benefits as long as they have "earnings." Unlik''
welfare which often has the perverse effect of penolizint) work, tho
EITC provides additional dollars to a low-income working family.
Last year United Ways and State Organizations played a key role in
helping three million additional low-income families receive the
Earned Income Tax Credit, which is often referred to as the
"working family's rebate."
For the past several years, United Way of America has worked with
the Center on Budget and Policy Priorities and over â– lO.ooo locally
Minded agencies to coordinate a national m'C oiimpa i ijn to ali'rl
fligible low-inc(jme working families to the credit and lo explain
how to receive it.
This year, alerting low-income families to the EITC is more
important than ever because:
• Millions of working parents lost their jobs in 1992. As a
result, many workers earned far less in 1^42, than they
previously did in their working lives. Consequently, many
newly eligible workers may not know about the EITC.
• Rligible families must filn « tax return (not the 1040 EZ -
also known as the short form), and they must also file a form
called "Schedult EIC." Last year IRS had a flexible policy toward
families that filed a tax return but did not attach the 'Schnlutr
EIC. If they appeared to be eligible from the face of the
return they were awarded the credit.
This year IRS has rescinded this policy. If a family fails to file
a 'Schedule EIC" , the EITC benefit will not automatically be leceived.
The IRS will, however, send a form letter notifying a family o)
their potential eligibility to receive the EITC credit, as well as
send them a blank copy of the "Schedule EIC" if, on the face of their
tax return, they appear to be qualified for the credit.
While hundreds of thousands are expected to receive this mailing,
how many will actually respond is unknown. Therefore, this year's
campaign is particularly important. United Way of America is proud
to be part of this outreach network.
Our involvement with the agencies we serve and others having daily
contact with deserving low-income families is an appropriate role
ill carrying out our mission "to supporc and serve local United Ways
to help increase the organized capacity of people to care for one
another. "
The EITC is important in working toward the ClintcMi
Administration's goal of overhauling our welfare system by
encouraging recipients to find a job after two years on public
assistance, by ensuring that a family of four, with a minimum-wage
income, lives above the poverty line, counting earnings as well as
government benefits, such as food stamps.
United Way of America looks forward to working with Congress and
the Administration to establish a respectful and responsive system
for helping families with children become self-sufficient, and
thereby are enabling families to remain together.
215
STATEMENfT OF
GEORGE K. YIN
PROFESSOR OF LAW
UNIVERSITY OF FLORIDA
BEFORE THE SUBCOMMITTEES ON
SELECT REVENUE MEASURES AND HUMAN RESOURCES
U.S. HOUSE COMMITTEE ON WAYS AND MEANS
April 30, 1993
Redesigning the Earned Income Tax Credit Program
to Provide More Effective Assistance
for the Working Poor
Summary
There are three serious defects with the existing earned income
tax credit (EITC) program: (1) many eligible families don't get the benefit;
(2) many who do receive it may not be eligible; and (3) almost none of the
recipients obtain the benefit incrementally during the course of the year. To
increase both the rate of participation and compliance and to ensure most of
the assistance is received in a timely fashion throughout the year, the EITC
should be broken into its two principal components, a benefit for the working
poor and a family allowance benefit. The "working poor" benefit would be
provided by exempting a base amount of wages from the payment of Social
Security taxes. The "family allowance" benefit would be furnished through a
refundable income tax credit based in part uf)on the number of children living
in the home.
Introduction
The existing EITC program, intended to provide cash assistance
for the working poor, contains a number of deficiencies. Many eligible, low-
income families receive no benefit whatsover because they are unaware of the
program, cannot cope with the tax forms necessary to claim the benefit, or are
fearful of interacting with the IRS. Moreover, almost none of the recipients
obtain the benefit incrementally during the year. As CBO Director Reischauer
recently commented, the assistance is therefore more like a winning lottery
award at the end of the tax year than a meaningful income support payment
for poor people or an incentive for work. Finally, the program is t)eset by
opportunities and incentives for noncompliance. The proposed expansion of
the program by the Clinton Administration may well exacerbate all of these
inadequacies.
Together with Jon Forman, a law professor at the University of
Oklahoma, I have been working on a project commissioned by the American
Tax Policy Institute to develop a series of proposals for improving delivery of
the EITC benefit to the low-income families it is intended to assist. In an
article to appear in a forthcoming issue of Tax Notes magazine, Jon and I
describe one method of doing so. In this testimony, I am pleased to
summarize our findings for the subcommittees.
The proposal is to split the existing credit into its two principal
comjxjnents, a benefit for the working poor and a family allowance benefit.
The "working poor" benefit, designed in large part to offset the Social
Security tax liability of low-income workers, would be provided by simply not
collecting those taxes in the first instance. It makes no sense, and is difficult
administratively, to collect such taxes and then reftmd them by means of the
EITC. The proposal would therefore establish an exempt amount of wages
below which no Social Security taxes would be due. The "family allowance"
benefit would be furnished through a refundable income tax credit based in
part ufton the number of children living in the home. Taken together, the
216
proposal should enhance the rate of participation and compliance and ensure
most of the assistance for low-income families is received throughout the year.
The "working poor" benefit
The "working poor" benefit should be provided regardless of
the family responsibilities of the worker, and should be large enough to ensure
that a family unit without children but headed by a full-time worker is pulled
above the poverty line. This general goal would be consistent with the
income security, work incentive, and federal tax offset objectives for the
existing EITC as well as the Clinton plan to extend the EITC for the first time
to low-income workers without children.
A major step towards providing approximately this benefit
would be to exempt low-income workers from paying the employee's portion
of their Social Security taxes as well as any income taxes. Currently, a
childless two-person household supported by a single worker who is employed
full-time for the full year and paid the minimum wage has $8,840 in annual
earnings (52 wks x 40 hrs/wk x $4.25/hr). Even apart from the EITC, the
household is already exempt from paying any income taxes. If the worker
were also exempt from paying the employee's share of Social Security taxes,
the household would be within $350 of the 1992 poverty guideline for a two-
person family unit, $9,190. A slight adjustment to the minimum wage to
compensate for the continuing failure to index that figure for inflation, and
indexing the figure for inflation in the future, would easily make up the
difference. Alternatively, no adjustment may be needed once the benefits of
other federal welfare programs, such as food stamps, are taken into account.
For ease of administration, we recommend creation of a flat
exemption amount, indexed to inflation, for al] workers from the payment of
the employee's portion of Social Security taxes. The benefit would then be
recaptured from higher paid workers through imposition of a higher Social
Security tax rate on earnings in excess of the exemption amount, a raising of
the current earnings cap for the old-age and survivors and disability insurance
(OASDI) portions of the tax, or both. Either of those two alternatives, as
well as the savings in general revenues from removal of a portion of the EITC
benefit from the income tax system, could be used to pay for the exemption.
Providing the "working poor" benefit in the manner just
described offers many advantages over the current system. First, it would
automatically be received by all eligible families in a timely manner in each
paycheck. Beneficiaries would not need to obtain information, determine or
assert eligibility, or even file a return. Low-paid workers would not suffer
any stigma from obtaining this federal subsidy. Employers would not be
burdened except for the slight change to adjust for the exemption amount in
calculating the amount of Social Security taxes to withhold. Finally, the
simplicity of the proposal and the relative absence of any self-certifying
features would almost assure a high level of compliance. Unlike present law,
there would be no incentive to report superfluous or fictitious work.
Of particular note is the ability of the proposal to improve both
the rate and timeliness of participation and the compliance rate. Not
uncommonly, those two goals are in conflict with one another.
The proposal would modify the taxable wage base for Social
Security tax purposes but would not take those modifications into account in
the calculation of benefits. Thus, workers benefiting from the exemption
would not suffer any reduction in benefits paid to them, and those paying
Social Security taxes on wages in excess of the current OASDI earnings cap
2-
217
would not obtain any increase in benefits. Critics might charge that the
proposal would thereby decouple the link between taxes and benefits so
essentia] to the view of Social Security being a retirement program.
Of course, the link between Social Security taxes and benefits is
actually quite tenuous and can vary dramatically depending on factors such as
family status, income level, and age. Accordingly, most analysts have come
to view the Social Security system as consisting of both pension and welfare
components. Indeed, the Clinton Administration's proposal to tax a greater
portion of the Social Security benefits of middle- and upper-income recipients,
but to continue refraining from taxing any of the benefits of lower-income
recipients, indicates additional acknowledgement of the part-pension, part-
welfare nature of the system.
More importantly, however, for purposes of this proposal, there
would be no Justification for any change in Social Security benefits. The
existing system requires all wage earners to pay a flat Social Security tax on
all wages up to the current earnings cap. But the Social Security tax liability
of low-income wage earners is subsidized with general revenues through the
EITC. They, in effect, receive reimbursement of their Social Security taxes
but still get to count their wages in calculation of their benefits. Thus, the
EITC has already decoupled the link between Social Security taxes and
benefits. Roughly the same result as current law could be replicated under
the proposal by exempting an initial amount of an individual's wages from
payment of Social Security taxes, recapturing that benefit from those earning
wages in excess of the exemption amount through an increase in the tax rate
or a raising of the cap, and subsidizing the benefit for low wage earners by a
transfer from general revenues.
The proposal would not be as finely targeted as the current
ETTC program in that families with low wage income but high, non-wage
income could nevertheless benefit from the Social Security tax exemption.
One way to address much of this problem would be to implement the
exemption on a weekly (or periodic) basis rather than on an annual one. For
example, the exemption might be limited to the first $170 in wages per week
($4.25/hr minimum wage x 40 hrs/wk) rather than an annual exemption
amount. A weekly exemption of this sort would tend to prevent much of the
benefit from going to high-paid workers who, nevertheless, have low annual
wages because they only work a portion of the year (e.g., high-paid summer
employees). It would also be easier for employers to implement than an
annual exemption. Other changes to the taxation of high, non-wage income
could also be effected to offset any remaining advantage.
The "family allowance" benefit
The "family allowance" benefit would provide additional
income security for low-income families with children. The theory of the
benefit would be to take account of the extra, non-consumption, expenses
incurred by families with children living in the home. The benefit would be
consistent with the theory of current poverty guidelines which take into
account family size. Both this benefit and the working poor subsidy, without
any recaphjre, would be available to a low-income working family with
children.
The simplest method of delivering the fiunily allowance benefit
would be to provide a refundable income tax credit to any family with
children living in the home, regardless of its work or income status. Up to
some level, the size of the credit might vary with the number of children in
the fonuly living at home. Such a credit would be universally available to
3-
218
BOSTON PUBLIC LIBRARY
3 9999 05705 9113
both low- and high-income families. If provided as a substitute for the
existing dependent's exemption, however, the credit would produce a shift in
benefits from current law in favor of lower-income families. Various
legislators, groups, and commentators have advocated similar proposals on
policy grounds quite apart from administrability concerns, and a number of
industrialized nations already have such a benefit in place. If desired, the
benefit could be packaged with, and provided in lieu of, other existing tax and
welfare benefits for children, such as the child care credit, the exclusion for
employer-administered child care assistance, AFDC, and food stamps.
The universal availability of the family allowance credit should
make it far easier to administer than the EITC, which is targeted for only a
portion of the population. Any working family could obtain the benefit
simply by completing a form, similar to the existing IRS Form W-4,
indicating the number of children in their household. The family allowance
benefit would then automatically be provided to middle- and upper-income
taxpayers during the year through adjustments to the withholding amount.
Low-income working families would also receive the benefit
during the course of the year through advance payments. The difficulties
under current law with the advance payment mechanism would be avoided
because all employees would be required to fill out the same form. Thus,
there would not be any problem of employees' being unaware of the option or
confused or stigmatized by the process. Noncompliance issues would be
limited to exaggerations offaniilyresponsibilities and the possible double
claiming of the benefit by those witJTmeiejhan one job. The former would
be alleviated by continuing the practice of r^umng-Social Security numbers
for all children claimed. The latter could be addressed by calculating the
advance payment amount in a very conservative manner. That procedure
would also assuage the concerns of those taxpayers fearful of owing taxes at
the end of the year due to excess advance payments received.
Avoiding work disincentives and marriage penalties
Although the focus of our study has been on improving the
administrability of the EITC program, it is noteworthy that the proposed