Can Tax Reform Help the Working Poor?

Can Tax Reform Help the Working Poor?

Poverty is a global issue, from developing nations and those struggling with corruption or political turmoil to economic superpowers like the United States. In fact, a 2014 report from the Census Bureau reported that the poverty rate in the U.S. actually rose—one in five American adults now lives below the poverty line, up from one in seven in 1980. Some argue that the burden placed on low-income taxpayers in the U.S. is responsible for perpetuating poverty and making it more difficult to escape. Could tax reform be the answer to this so-called “poverty tax?”

What Is the Poverty Tax?

While a government would have to be draconian indeed to tax its poorest citizens at a higher rate as punishment, the term “poverty tax” refers to an invisible monetary burden imposed on those in the lowest income brackets. For example, low-income individuals are far more likely to take out a payday loan in order to make ends meet; these loans have outrageously high interest rates, meaning that most people who take out a payday loan wind up owing far more than the original sum. Many have no choice but to take out another loan to pay the debt from the first, eventually becoming ensnared in cyclical debt.

But doesn’t the government provide subsidies to the lowest earners, such as the Supplemental Nutrition Assistance Program (SNAP, commonly referred to as food stamps) and federally subsidized healthcare, that should solve this problem? Yes and no. The problem stems from the fact that many individuals and households don’t earn enough to pay for what they need but earn too much to qualify for federal assistance. These people, the working poor, often find themselves working two or three jobs and still struggling financially.

Past Efforts to Aid the Working Poor

No government wants to see its citizens suffer, and there have been countless attempts to fix the societal ill that is poverty. The tax code in the United States–when it was first introduced in the early 1900s–ignored low-income households altogether; later reforms only burdened poor households, pushing many below the poverty line. In 1975 the earned-income tax credit (EITC) was introduced, and, along with the child tax credit in 1997, it represented a dramatic shift in the way the government addressed poverty. Instead of handouts, the idea was to incentivize education and work while reducing the financial burden of buying a home and starting a family. And because of how broadly these credits are applied, nearly half of all U.S. taxpayers benefit, directly or indirectly, from the EITC. Knowing how effective these two tax credits have been at reducing poverty among the working class in the past, could tax reform be the key to helping the working poor now?

Could Tax Reform Be the Answer?

Citizens and politicians across the country have been clamoring for (and rallying against) a higher federal minimum wage, heralding it alternately as the last best hope for a reduction in the poverty rate and a harbinger of economic doom. While both sides of the argument have merit, the solution is probably more complicated than this one change anyway. It is difficult to argue that the current federal minimum wage of $7.25 is a living wage in most areas of the country, but it’s also not clear that onus to lift taxpayers out of poverty rests on the shoulders of their employers, particularly when those employers are small businesses whose budgets may not be able to absorb the cost. And the poverty rates in 21 states and the District of Columbia that already have a minimum wage higher than the federally mandated minimum aren’t dramatically better than in other regions; which gives ammunition to detractors of raising the minimum wage.

By far the most dramatic reductions to poverty among the American working class have been the result of tax reform, largely thanks to the EITC and the child tax credit. It seems likely that the most effective way to assist the working poor would be to adopt economic and political policies that were modeled on what made those programs so effective: focusing on what low-income individuals and families actually need, and directing resources to those who need them most.