Since enactment of the 1986 Tax Reform Act, federal income tax parameters have been designed to ensure that federal income and payroll taxes don’t tax people into, or deeper into, poverty, with one glaring exception — low-income childless adults. Today, more than 5 million workers aged 19-67 are taxed into or deeper into poverty by federal taxes.[1] The main reason is that the Earned Income Tax Credit (EITC) for this group is much too small (and for some, isn’t available at all) to offset the income taxes and employee share of payroll taxes that they must pay.

A number of members of the House and Senate have introduced legislation in this Congress that would make major progress in addressing this problem by substantially expanding the EITC for workers not raising children in their homes. The proposals would reduce poverty among these workers while improving their well-being and strengthening the incentives for jobless individuals who aren’t raising children to enter the labor force.

For example, the Working Families Tax Relief Act, introduced by Senators Sherrod Brown, Michael Bennet, Richard Durbin, and Ron Wyden, as well as by Representatives Dan Kildee and Dwight Evans in the House, would boost the maximum EITC for childless adults from about $530 today to $2,070, raise the income limit at which single individuals no longer qualify for the credit from about $16,000 to about $25,000, and expand the ages at which individuals can be eligible for this credit from 25-64 to 19-67 (except for full-time students aged 19-24, who would remain ineligible because their parents can claim many of them for the larger EITC for families with children).[2] These changes would reduce the number of workers aged 19-67 (other than full-time students) whom the federal tax code taxes into, or deeper into, poverty to by about 91 percent — from 5.51 million today to fewer than 500,000. [3]

Childless Worker With Income at Poverty Line Owes $1,000 in Federal Taxes

The standard deduction, EITC, and Child Tax Credit (CTC) are set at levels that ensure that families with children don’t have net federal tax liability if they earn poverty-level wages. As a result, no families with children are taxed into poverty. Single childless adults, in contrast, begin owing income tax when their earnings are still below the poverty line, and they receive little or no EITC. They also face significant payroll taxes. As a result, the federal tax code taxes millions of employed individuals aged 19-67 into, or deeper into, poverty.[4]

Consider, for example, a 25-year-old single woman who makes poverty-level wages in 2019 ($13,340) as a retail salesperson, working roughly 35 hours a week throughout the year at the federal minimum wage:

Some $1,021 (7.65 percent of her earnings) in Social Security and Medicare payroll taxes are deducted from her paychecks.

When filing her tax return, she will claim a $12,200 standard deduction. Subtracting this amount from her income leaves $1,140 in taxable income. She is in the 10 percent bracket and hence will have a $114 federal income tax liability.

The sum of her $114 in income tax liability and $1,021 in payroll taxes is $1,135.

She will be eligible for an EITC of $172.

Her net federal tax liability thus will be $1,135 minus $172, or $963.

In short, federal taxes will drive this woman making poverty-level wages $963 into poverty. (See Figure 1.)

A number of recent proposals would address this shortcoming of the tax code. Among the most recent is the Working Families Tax Relief Act, introduced last month by the four senators mentioned above and co-sponsored by 42 others. It would make the following changes:

Increase the phase-in rate. Under current rules, the EITC for childless workers phases in at a rate of 7.65 percent. In other words, a worker receives an EITC of 7.65 cents for each additional dollar of earnings until the credit is fully phased in at earnings of $6,920 in 2019, at which point the credit equals about $530. The bill would boost the phase-in rate to 20 percent (i.e., 20 cents for each additional dollar earned).

Under current rules, the EITC for childless workers phases in at a rate of 7.65 percent. In other words, a worker receives an EITC of 7.65 cents for each additional dollar of earnings until the credit is fully phased in at earnings of $6,920 in 2019, at which point the credit equals about $530. The bill would boost the phase-in rate to 20 percent (i.e., 20 cents for each additional dollar earned). Boost the maximum credit for childless adults from $530 today to about $2,070. This increase results from raising the phase-in rate (as noted just above) and raising the income level at which the credit stops phasing in. The bill also raises the income level at which the credit starts phasing out. (See Table 1.)

from $530 today to about $2,070. This increase results from raising the phase-in rate (as noted just above) and raising the income level at which the credit stops phasing in. The bill also raises the income level at which the credit starts phasing out. (See Table 1.) Expand eligibility to include more low-wage childless adults. The current EITC for single childless adults phases out entirely at an income of $15,570. A cashier or landscaper, for example, working for low wages and making $16,000 a year receives no EITC. The legislation would raise the income level at which the credit entirely phases out to about $25,000.

The current EITC for single childless adults phases out entirely at an income of $15,570. A cashier or landscaper, for example, working for low wages and making $16,000 a year receives no EITC. The legislation would raise the income level at which the credit entirely phases out to about $25,000. Expand the eligibility age range to 19-67. Workers under 25 and over 64 are currently ineligible for the childless workers’ EITC.

TABLE 1 Working Families Tax Relief Act’s EITC Proposal for Childless Workers (2019) Current law Proposal Phase-in rate 7.65% 20.00% Phase-out rate 7.65% 15.98% Income level at which credit stops phasing in (“first kink point”) $6,920 $10,370 Income level at which credit begins to phase down (“second kink point”)* $8,650 $11,590 Income level at which credit phases out entirely* $15,570 $24,569 Maximum credit $529 $2,074 Age range for qualifying tax filers 25-64 19-67

The retail salesperson with poverty-line wages in the example cited above would receive an EITC of $1,797 in 2019 under the proposal, a large increase from her $172 EITC under current law. This would more than offset her $1,135 federal tax liability, so the federal tax code would stop taxing her into poverty. Under the proposal, about 600,000 childless working people would no longer be taxed into poverty, and nearly 5 million would no longer be taxed deeper into poverty.

It’s important to note, however, that while expanding the EITC would mark significant progress for low-wage workers, regressive state and local taxes could still push them into poverty. State policymakers should act as well, by raising the income levels at which state income taxes kick in and/or by creating or expanding state EITCs.[5]

The principle that we should not tax people into poverty resonates across the political spectrum. Low-income childless adults are the sole group for whom the federal tax code falls short here. Addressing this shortcoming should be a priority for future tax legislation.