Childless workers often lose out on tax credits. Not with this program.

Why We Wrote This

At a time when wide income inequality can seem intractable, we found an Atlanta experiment that’s testing the promise – and limits – of expanded tax credits for poor workers.

Susan Walsh/AP/File
The exterior of the IRS building in Washington. Refundable tax credits have become an important channel for improving the lives of low-income Americans without discouraging work.

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The Earned Income Tax Credit has moved millions of Americans out of poverty – and it’s won some bipartisan support because it assists the poor without discouraging work. People in low-wage jobs can get an income boost through tax credits, even if they owe no income tax.

Now, some lawmakers hope Congress can expand the program, which currently does little for workers without dependent children. And some small-scale experiments are showing what that might mean for reducing inequality.

A nonprofit effort called Paycheck Plus has been tested since 2014 in New York City and Atlanta. It is helping to ease the bite of poverty for people like Keith Hardrick, who qualified for a payout of $1,500 to supplement his wages of $12,000 last year.

But researchers say tax credits are at best a partial fix for bringing people from the sidelines into the labor force. “Tax incentives are a good thing ... but they’re not going to solve the problem of getting people into the labor market and training up their skills,” says Lawrence Katz at Harvard University.

After Keith Hardrick quit his job last year as a school social worker, his income took a dive. As he figures out his next career move, he’s tapped into the gig economy, recharging electric scooters for a startup company in Atlanta. All told, he earned around $12,000 in 2018.

But this year’s tax season smiled on Mr. Hardrick. Not because of President Donald Trump’s tax cuts, which mostly accrue to corporations and high earners, but because he had enrolled in a three-year experimental program that tests what happens when single workers on low incomes receive more generous annual tax refunds.

In the first two years, Mr. Hardrick didn’t see any benefits because his income was too high. This time, though, he qualified for a payout of $1,500. He plans to use the money to change residences this month, and to set up his new place while paying some bills.

“It helps people who need a little extra,” he says of the program, as he sits at the nonprofit On The Rise Financial Center. “It’s like a stimulus package.”

The program in Atlanta mimics the Earned Income Tax Credit, a federal initiative that is credited with moving millions of families out of poverty by providing a supplement to low wages.

Unlike that program, however, it is targeted not at parents but at adults without dependent children, who get the short end of the EITC stick. By doing so it fits squarely into the national debate over how to reduce inequality while promoting work and responsibility in an era of often-stagnant wages. It’s a debate that animates the crowded left field of Democratic presidential aspirants and other officeholders, as well as conservatives who see EITC as a pro-work policy that is preferable to welfare.

“Not every policymaker loves it but it does have broad support,” says Caroline Schultz, a senior associate at MDRC, a New York-based nonprofit that ran the EITC-style program in Atlanta and New York in partnership with public and private organizations.

Potential bipartisan appeal 

Proposals to expand the $71 billion EITC have come from both sides of the aisle. In 2016, President Barack Obama and House Speaker Paul Ryan both called on lawmakers to change the tax code so that workers who aren’t raising children can qualify for more cash. The EITC is a “refundable” tax credit, meaning it can provide a benefit to people even if they owe no federal income tax. The Obama and Ryan proposals would have raised the maximum refund and phased it in more quickly. But Congress left the EITC unchanged when it passed the 2017 Tax Cuts and Jobs Act signed by Trump.

Since then, Democrats in Congress have drafted ambitious anti-poverty bills that lean on the EITC for fiscal redistribution. The GAIN Act, with big increases for qualifying families and for single adults like Mr. Hardrick, has been sponsored in the Senate by Sen. Sherrod Brown, D-Ohio, and in the House by Rep. Ro Khanna, D-Calif. And Sen. Kamala Harris, D-Calif., has also proposed an expansion of the EITC and other refundable tax credits, including for middle-class families.

“There’s good reason to think we haven’t exhausted the benefits of the program,” says Hilary Hoynes, a professor of public policy and economics at the University of California, Berkeley who has studied the EITC’s effects on the poverty and health of low-income families.

The EITC dates back to 1975 but has since been expanded several times under Republican and Democratic presidents. Many states also offer refundable tax credits for low-income filers, with varying degrees of generosity.

The toolkit for reducing inequality 

Of course, this is just one way to address inequality. Experts say that if the U.S. wants to help people near the bottom of the income ladder, a range of approaches can help, from raising minimum wages to offering targeted support for things like housing, transportation, or education. But many also say programs like EITC fill an important role, boosting incomes without making it more expensive for people to be hired or discouraging them from working.

Under the federal code, a single mother with two children can claim a credit of up to $5,828 for 2018, with the benefit phased out above $46,703. However, low-income adults without dependent children have a much lower income cut-off ($15,570) and stingier payouts.

This was the group that MDRC recruited for its program, called Paycheck Plus. In New York, it assigned 6,000 childless adults at random into two groups. From 2014, the first group of 3,000 was given assistance with filing their tax returns and could claim the existing credits. The second group was told about Paycheck Plus, helped to file tax returns, and offered a maximum refund of $2,000 with eligibility of up to $30,000 in income, on top of any state and federal credits that they received.

In Atlanta, where the program began in 2015, there were 2,000 workers assigned to the control and 2,000 to Paycheck Plus groups. All refunds were paid after the IRS tax deadline in April.

Low-paid workers often cycle in and out of eligibility for programs like EITC as their incomes and family situations change. Policymakers usually try to phase out benefits so that workers don’t face a sharp cut-off that could discourage them from taking jobs or working longer hours.

“Any program you want to target to low-income people you have to phase out in some manner. So there’s always concern that people would cut back,” says Cynthia Miller, a senior fellow at MDRC and lead author of a 2018 evaluation of the New York trial.

In New York, MDRC found that enrollees in Paycheck Plus had higher after-tax earnings and saw a reduction in severe poverty compared to the control group. Noncustodial parents, typically men, were more likely to make child support payments when they got bonuses.

(In Mr. Hardrick’s case, he has two school-aged children who live with their mother. He says he doesn’t have to make support payments but contributes to their household budget.)

A boost in employment? Partially.

MDRC researchers point to an encouraging uptick in employment of disadvantaged men in New York. This category of workers, which includes men who were formerly in jail or prison, have largely fallen out of the formal labor market, says Ms. Miller of MDRC. “There’s a lot of interest in [the question of] how do we pull them back in?”

Still, with the exception of these disadvantaged men, the overall effect of the New York program on male employment was zero, whereas female workers responded across the board by working more, giving a modest boost to overall employment rates, up 1.9 percentage points.

This isn’t a surprise, says Lawrence Mead, a professor of politics and public policy at New York University. Women tend to respond better to pro-work incentives like the EITC, which was part of President Bill Clinton’s 1990s welfare reforms, of which Professor Mead was a prominent supporter.

He’s skeptical that tax refunds can have the same effect on men, particularly those who don’t live with their children, and advocates mandatory requirements for welfare that force more men to take employment. “The idea that incentives cause men to go to work is false,” he says.

Lawrence Katz, an economics professor at Harvard University and co-author of the MDRC report, says he had expected to see modest gains in employment led by women. He was pleased to see a demonstrated cut in poverty. “Among programs to help a group of hard-working, low-income individuals it seems to do a reasonable job of transferring money,” he says.

And while the bump in work for disadvantaged men was positive, he agrees that it will likely take more than the promise of tax refunds to significantly increase their employment. An expanded EITC combined with occupational training and other labor-market interventions would be a more effective pro-work way to tackle poverty.

“Tax incentives are a good thing and they’re easy to implement, but they’re not going to solve the problem of getting people into the labor market and training up their skills,” says Mr. Katz.

Help for tight family budgets

For Shakira Hightower, a parent liaison at an elementary school in Atlanta, her cash bonus from Paycheck Plus has helped her to develop a side project from her full-time job. She is setting up a nonprofit to help professional families in her community. On her current salary of $23,000, she qualified for a $1,300 payout for the past two years and she expects a similar amount this time.

Ms. Hightower is a single mother with two sons who are in college, so she no longer receives the EITC benefit paid to custodial parents. But she lives on a tight budget and says that Paycheck Plus has been a welcome boost.

MDRC plans to publish its findings from Atlanta this summer. Ms. Schultz says Atlanta’s results may differ since its economy has lower wages and a cheaper cost of living than New York.

The reality remains that one in five workers earned less than $11.40 an hour in 2017. For full-time workers that is the equivalent of $22,800 a year. The EITC can bolster incomes and lure some workers back into the labor market, but even some fans say it’s no substitute for other steps to ensure that labor gets a bigger share of the economic pie.

“If you’re already a minimum wage worker working full-time, the EITC is going to reduce your poverty but not change your employment rate,” says Ms. Hoynes, who sits on an advisory board at MDRC.

“At the end of the day,” she says, “we’re trying to identify policies to increase wages – and earnings.”

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