The tax system is keeping 2.2 million people out of poverty

August 6, 2013

This graph, buried in an interesting paper by NYU Law's David Kamin, tells a fascinating story:

The solid black line is the official poverty rate, which, frustratingly, doesn't take into account the effect of taxes on poverty (an alternative measure called the Supplemental Poverty Measure corrects this). The dotted red line is what the poverty rate would be if you took federal income and payroll taxes into account.

From 1979 to 1994 or thereabouts, taxes served to increase poverty. You'd expect that -- taxes take your money, and not having enough money is a leading cause of poverty. But then that changed. Once you took the tax system into account, poverty was lower. The effect was particularly pronounced during the recession.

So what happened? Refundable tax credits happened! Kamin estimates that 60 percent of the change is attributable to increases in the Earned Income Tax Credit. The 1993 Clinton budget made childless people eligible for the EITC, and increased the maximum credit for parents. It was also expanded in the 2001 Bush tax cuts and the 2009 stimulus package. Another 30 percent of the change, meanwhile, is due to the Child Tax Credit, which was created in 1997, and expanded in both the 2001 cuts and the stimulus.

What this means, among other things, is that the poverty rate is hugely sensitive to changes in tax policy. Kamin estimates that, had the fiscal cliff been allowed to take effect, the federal tax system would have started increasing poverty again in 2013, by about 0.5 percentage points. But because of the deal that was reached, and in particular due to the extension of the stimulus's expansions of the EITC and the CTC, the tax system is still reducing poverty, to the tune of 0.7 points, only slightly less than the 0.8 point reduction under 2012 policy:

A 0.7 point reduction may not seem like a lot, but it is. There are about 314 million people in the U.S.; 0.7 percent of that is about 2.2 million people. Let me repeat that: millions of people are kept above water by refundable tax credits.

The EITC and CTC aren't universally popular. Michael Schuyler and Stephen J. Entin at the Tax Foundation argue that repealing the EITC and replacing it with across-the-board cuts to tax rates would boost economic growth. But it would almost certainly throw millions of people into poverty too.

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Sarah Kliff | August 6, 2013