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Clinton's Social Safety Net: A Bigger Tax Credit

By Steven Mufson
Washington Post Staff Writer
Saturday, March 6, 1993; Page A01

In an effort to offset the effect of new energy taxes, President Clinton wants to expand a program that subsidizes the wages of the working poor into one of the federal government's largest anti-poverty programs, rivaling food stamps and Aid to Families with Dependent Children.

Clinton has proposed doubling the annual cost of the 18-year-old program, known as the earned income tax credit (EITC), to $25.4 billion by 1997, and an early Treasury draft of the plan would expand its scope to cover more than two of every five American families by that year.

The earned income tax credit uses the tax collection system to subsidize wages for low-income Americans with children.

For every dollar that these families earn up to a certain ceiling, they are rewarded with a cut in taxes.

Those who owe no taxes can receive extra money from the federal government – a kind of tax refund that amounts to extra cash income.

Some tax-cutting conservatives hail this device as a tax incentive for work. Social-minded liberals champion it because it funnels billions of dollars to poor families with children.

During the campaign, Clinton vowed to enlarge the credit "to ensure that no one with a family who works full time has to raise children in poverty."

Clinton reminded aides of that pledge as they drew up his budget plan, recalled Treasury Secretary Lloyd Bentsen. Bentsen said he replied: "Mr. President, we can fix that."

It is a bold promise, reminiscent of President Franklin D. Roosevelt's pledge for Social Security, President Lyndon B. Johnson's promise for a Great Society and President Richard M. Nixon's plan for a guaranteed minimum income for every family.

"The credit is a lifeline for the working poor," said Senate Labor and Human Resources Committee Chairman Edward M. Kennedy (D-Mass.).

Strong bipartisan support for the program makes approval of a broader earned income tax credit likely.

Critics, though, say the program does not work as its designers intended and that Clinton wants to useCurrently, about one in three American families qualifies for the earned income tax credit. a benefit program for the poor to help some middle-class families.

Yet even a Treasury draft of the expanded program would not have been big enough to lift all working families out of poverty. Treasury experts have gone back to the drawing board, deleting details from the tax document they released last month.

The early draft of Clinton's plan would raise the credit for a family with two or more children from the current maximum of $1,511 to $2,400. And families with two children could remain eligible for the credit until their income reached $30,000, up from the current level of $23,050.

In 1994, when the proposal would take effect, the poverty line for a family of four is predicted to be $15,192, well above the annualized current minimum wage of $8,840.

For the first time, under the Clinton plan, individuals without children would collect smaller credits. One group that may benefit: struggling graduate students who earn very little and are no longer dependents of their parents.

Some skeptics say that Clinton's proposal, in trying to protect families with $30,000 or less from energy tax increases, runs the risk of creating a new middle-class entitlement program at a time of gigantic federal budget deficits.

"It opens the door to a whole new realm of entitlements that I think is quite unhealthy," said Douglas Besharov, resident scholar at the American Enterprise Institute, a conservative think tank. "This in effect puts half of all American families on a semi-welfare program. We can't provide that kind of subsidy for half of all families without major increases in taxation."

Currently, about one in three American families qualifies for the earned income tax credit. More than 13 million families claimed it for 1991.

Still other critics say that the program, however well-intentioned, does not work that well.

"One of the problems with the EITC is that it's just a big mess," said Jane Gravelle, tax and budget expert at the Congressional Research Service. She cited a study that showed that about one-quarter of the people eligible for the tax credit did not file for it and about two-fifths of the people who claimed the credit should have been ineligible. Many eligible workers either do not know about the credit, or fear losing other welfare benefits if they claim it.

The EITC was designed to supplement low wages, giving poor working people with children some extra money every week to meet their living expenses.

With every additional dollar of earnings, an eligible worker with children receives a tax credit of 18.5 cents to 19.5 cents.

The authors of the EITC wanted employers to alter withholding rates from paychecks. But in reality, because of complex paperwork, virtually all people calculate the credit only at tax filing time, if at all, according to budget experts. Workers who have overpaid or who have no tax bill receive lump-sum refunds.

"It really doesn't help you put bread on the table week after week," said Robert D. Reischauer, Congressional Budget Office director. "Nor does it clearly tie your work effort to your reward from work. ... What it has become is very much like a winning lottery ticket at the end of the tax year."

Clinton plans to simplify the complex two-page form. He is also likely to eliminate low-income health and special low-income child tax credits and use the money to expand the EITC.

The earned income tax credit creates powerful incentives for people to work while they are accumulating credits. But once a person earns enough money that the credit starts to phase out, the loss of the benefit effectively amounts to a higher tax rate on every new dollar earned.

The loss of the tax credit reduces the take-home pay for every additional dollar. That, say critics, discourages people from working more and creates a powerful incentive for them to lie about their income.

The loss of the benefit, combined with Social Security taxes and income taxes, puts the effective marginal tax rate burden on people in the phase-out range at about 28 percent, close to the rate on the country's top earners.

Still, the earned income tax credit has powerful backers.

Jim Weill, general counsel of the Children's Defense Fund, calls the credit "wonderfully effective" and "one of the few ways this country gives a boost to the working poor and near-poor families."

Supporters of the program say that even with all the practical problems of reaching the right people, the credit is more effective than programs such as food stamps or supplemental Social Security payments.

Since people have to work to get the credit, most lawmakers do not think of it as welfare.

"In politics, we'remuch more comfortable as a nation helping out and supporting incomes of low-income families where parents are working," said Weill, "because of a well-placed belief on everyone's part that parents should be working to support their kids."

Michael Stern, who in 1975 was a key aide to then-Senate Finance Committee Chairman Russell B. Long (D-La.), said that rewarding work was important to Long's initial goals.

Under the earned income tax credit, Stern said, "You're only paying people in proportion to their work effort. And the assistance would increase as work effort increased, whereas welfare decreased as work effort decreased."

"To {Long}, that was a very important policy difference," Stern said.

"The reason for having it in the first place was to give some relief to the working poor," said Alice M. Rivlin, deputy director of the Office of Management and Budget. "We have expanded it a lot. It becomes general support for low-income people. We think that's a good thing to do {and} a fair thing to do."

© Copyright 1993 The Washington Post Company

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