A Valentine’s Day present from the federal government? It could happen. No, I’m not talking about flowers or candy. I’m talking about getting rid of the “marriage penalty” that’s built into one of our biggest welfare programs.
That program is the Earned Income Tax Credit. The EITC is the nation’s second largest means-tested cash welfare program. EITC, unlike other welfare programs, is structured to give incentives to work. But reforms are needed to help it better achieve that purpose — and to ensure that it doesn’t discourage marriage.
EITC provides “refundable” tax credits to low-income individuals. What’s a “refundable tax credit,” you may ask? It’s simply a cash welfare grant to individuals who have no federal income tax liability.
Historically, around two-thirds of the families with children receiving the EITC are single parents, and one-third are married couples, according to welfare expert Robert Rector. The average value of an EITC payment to a family with children was $2,919.
Now, there are several problems with the EITC program that need to be addressed. Fraud is rampant, for one thing. Erroneous overclaims account for at least a quarter of the $59 billion in annual EITC spending.
Another problem is how EITC benefits can go to non-parents. Grandparents, aunts, uncles, and older siblings and stepsiblings can often claim EITC cash bonuses for children. As Rector points out, this leads to “benefit shopping,” arbitrarily assigning children for EITC purposes to relatives whose earnings will elicit the highest EITC payment. Taxpayers wind up paying more, and the EITC work incentive is dodged.
But let’s focus for now on how the EITC discriminates against married couples. In most cases, the EITC benefits received by unmarried parents who cohabit are significantly higher than those received by similar couples who are married.
To understand why, consider a father and mother who each earn $20,000 per year and have two children. If they simply live together, each parent will file a separate income tax return, and their income will be maximized if each parent claims one child for tax purposes. They won’t pay any income tax, but will receive a combined $7,269 in refundable tax credits through the EITC and the Additional Child Tax Credit, or ACTC.
But if they marry, it’s a different story. They still pay no federal income tax, but their refundable tax credits are cut from $7,269 to $2,960, a loss of $4,308. Just getting married forces this couple to give up about one-tenth of their income. And let’s not forget that the cohabiting couple is likely getting other benefits as well, such as food stamps, which aren’t available to the married couple.
This disincentive to marriage is not only unwise, but perverse. “Research consistently demonstrates that married adults are physically and emotionally healthier than non-married adults; they are also more economically secure,” Rector writes. “Family structure is also the most important factor in predicting upward social mobility of children, and children with two parents do best.”
How much better do they do? When looking at families with the same race and same parental education, we find that, compared to intact married families, children from single-parent homes are:
- More than twice as likely to be arrested for a juvenile crime.
- Twice as likely to be treated for emotional and behavioral problems.
- Roughly twice as likely to be suspended or expelled from school.
- A third more likely to drop out before completing high school.
There’s a lot to fix in the EITC program, and one of the most important is eliminating its marriage penalty. It may not seem very romantic, but increasing EITC benefits for married couples with children is one of the best Valentine Day’s presents Uncle Sam could give.
Ed Feulner is founder of The Heritage Foundation (www.heritage.org).