Increase the Reward to Work While Expanding the Credit for Families with Two or More Children. The third provision of the President’s proposal would provide an additional tax break, and an additional incentive to work, for families with two or more children. Under current law the EITC for these families is reduced by 21.06 percent for each dollar they earn above the maximum threshold. The President’s proposal would lower this phase-out rate to 19.06 percent -- a tax break for 5.4 million of America’s hard-pressed working families.
Encouraging Savings Through Simplification. Under current law, 401(k) contributions and other forms of nontaxable earned income are counted as income in computing the EITC. For many families this means that if they increase their contributions to a 401(k) then they will see their EITC reduced. The President proposes to encourage savings for poor people by eliminating nontaxable earned income from the calculation of the EITC. In addition to encouraging savings, this step will simplify the EITC, and continue to increase compliance.
THE PRESIDENT’S 1993 EITC EXPANSION HAS CONTRIBUTED TO THE LARGEST REDUCTION IN POVERTY IN OVER THREE DECADES
In 1993, the President Signed Into Law the Largest EITC Expansion Ever. The President’s policy provided a tax cut for 15 million working families. For every dollar a very low-income working parent with one child earns, the EITC was increased from 23 cents to 34 cents (25 cents to 40 cents for two plus children). The maximum credit was increased by over $1,500. The income limit on eligibility was increased by about $3,700.
Nearly 19 Million Families Claim the EITC. In FY 1999, the total cost of the program was $30.5 billion. In 2001, the average credit for all claimants will be $1,680 and for claimants with children it will be $1,990. [Source: U.S. Department of the Treasury]
In 1998, the EITC Was Directly Responsible for Lifting 4.3 Million People Out of Poverty -- Twice the Number Lifted Out in 1993. Census Department statistics show that the EITC was directly responsible for lifting 4.3 million people out of poverty in 1998 – more than twice the number lifted out of poverty in 1993. The indirect contribution of the EITC to poverty reduction may be even greater given the evidence that the EITC provides a powerful incentive to work. [Source: Calculations using data from the U.S. Census Bureau.]
In 1998, the EITC Was Directly Responsible for Lifting 2.3 Million Children Out of Poverty. The 2.3 million children lifted out of poverty by the EITC include 600,000 African-American children and 600,000 Hispanic children. [Source: Calculations using data from the U.S. Census Bureau.]
Expanded EITC and Higher Minimum Wage Has Led to Large Real Income Growth For Hard-pressed Families. A working parent with two children earning the minimum wage in 1993 made $10,559 with the EITC (in 1998 inflation-adjusted dollars) -- well below the poverty line. With the 1993 increase in the EITC and the 90 cent increase in the minimum wage in 1996 and 1997, a similarly situated family in 1998 was above the poverty line -- making $13,268 -- a 26 percent inflation-adjusted increase in their standard of living.
Poverty Rate Fell To 12.7 Percent in 1998 -- Its Lowest Level Since 1979. The poverty rate has declined from 15.1 percent in 1993 to 12.7 percent in 1998 -- that’s the largest five-year drop in poverty in nearly 30 years (1965-1970). There are now 4.8 million fewer people in poverty than in 1993. (In 1998, the poverty threshold was $16,660 for a family of four.) [Source: U.S. Census Bureau]