Supporting Families, Rewarding Work: A Proposal to Reform and Enhance the EITC and the CTC
The federal Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are important sources of income support to workers with low earnings and to low-income families with children. In this policy brief, the authors propose incremental reforms to both credits that would streamline the dual goals of rewarding work and supporting children, while also expanding income assistance for low-income families with children.
This proposal reorients the EITC around its primary purpose of subsidizing wages of low earners, while using the CTC as the primary tool to support families with children. The authors propose a simplified EITC schedule with higher income thresholds and credit amounts for married tax filers, where thresholds and credit amounts vary if filing units claim children, but not by the number of children claimed. This structure maintains the desirable work incentives of the EITC while separating out the delivery of income assistance targeted at children.
This streamlined EITC is combined with the enhanced CTC proposed by Edelberg and Kearney (2023). This enhanced CTC features an increased full credit amount, partial refundability for those with zero earnings, a steep phase-in, and a gradual phase-out range at high levels of income. It would reduce child poverty, maintain tax incentives to work for low earners, and discipline the costs of the program by beginning the phase-out of the credit at a lower household-income threshold than the one set by current law.
Current (1 Child) vs Proposed EITC Schedule
Current and Proposed CTC Schedule
Under this plan, families with children making under $100,000 will see an average increase in annual income of 11.5 percent. Those making under $40,000 annually will see the greatest percentage gains. Under our proposal, child poverty (as measured by the supplemental poverty measure) will fall by 3 percentage points; our proposal is expected to cost $55.6 billion annually relative to the current EITC and CTC.