Although I don’t believe in providing a “guaranteed wage” as a social program, I do believe there is a simple way to increase the income of lower wage WORKERS! Expand the Earned Income Tax Credit program. Reward those that work and file taxes as a way to reduce poverty. EITC actually encourages working, the higher your income the more EITC you get within various ranges.
I usually don’t write about this topic but as we end tax season some things have become pretty apparent to me. There are many lower income workers that are struggling to make ends meet. These are couples with small families and single mom’s, they struggle to provide a living and a better future for their children. These are workers that are stuck in the lower paying jobs, many under $15/hr. Even workers making $15/hr, about $30,000 a year (about 2,080 work hours per year), find it quite difficult to cover healthcare, rent, food, transportation and basic essentials.
There is however a potential answer to help along these lower wage earners, a system that is somewhat already in place. Our new tax law taking effect in 2018 provides low wage earners with additional increases in valuable tax credits like Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). As valuable as these tax credits are they can be enhance and distributed in a far more meaningful way. I’ll explain the distribution after this example.
Example: A single mother, we’ll call her Mary, has one dependent and is filing her 2017 tax return as Head of Household. Mary earned $26,000 (about $13/hr) in 2017. After standard deductions, 2 exemptions and the Child Tax Credit, Mary would currently owe NO Federal taxes. She would be entitled to about $2,100 in Earned Income Tax Credit and an additional $100 in additional CTC. A $2,200 refundable credit PLUS the withholding tax taken from her paycheck, let’s assume 10%. This refund to Mary of $4.600 is a major event in her life. Under the new 2018 tax law she would get a slightly bigger refund. By the way, the EIC encourages workers to earn more money, not less. This is not food stamps or welfare, you need to work to get these credits.
So, how can this process be enhanced to better accommodate low income workers like Mary and her family?
A Simple Solution:
- Allow all employer’s to identify their low income employees with family members and change the IRS withholding tables to allow for $0 Federal tax withholdings. As in Mary’s example, she won’t owe Federal tax anyhow. Her monthly cash flow would improve by over $200!
- Allow the same employers to advance fund the Earned Income Credit to employees like Mary in her paycheck. This might sound difficult, but it may be simple. We’ll assume that the employer is already making quarterly withholding payments (form 941) along with Social Security and Medicare. There should be plenty of cash here to pre-fund employees like Mary’s EITC.
- We’ll assume Mary would prefer to have an extra $400/mo in cash instead of a one-time refund check a year later.
- Congress should further improve the Earned Income Tax Credit calculations maybe even double it.
- We need to plug the gap where a single wage earner, working full-time, year round at the federal minimum wage currently does not qualify for EITC.
- More individual states should adopt an EITC at the state level. Currently 29 states and the District of Columbia have EITC’s. However, a few of these states make their EITC “not refundable”. Meaning that you can only apply their EITC against actual state taxes.
- It was estimated that in 2016, 20% of eligible workers did NOT claim their EITC.
Moving the working poor out of poverty makes sense for all of us. It’s hard to cheat this system.