This morning, Senate Budget Committee Chairwoman Patty Murray introduced the “21st Century Worker Tax Cut Act” to establish a new deduction for married couples who are both employed and have young children, and to increase the earned income tax credit (EITC) for childless workers. The Act would implement the policies introduced by two Hamilton Project proposals designed to help “make work pay” by allowing low- and middle-income families keep more of what they earn:
- “Giving Secondary Earners a Break: A Proposal to Help Low- and Middle-Income Families,” by Melissa S. Kearney and Lesley Turner, University of Maryland
- “Employment-Based Tax Credits for Low-Skilled Workers,” by John Karl Scholz, University of Wisconsin, Madison
The Act provides relief and support for hard-working families by amending the tax code to reflect the realities of modern-day life. Thirty years ago, the majority of families with children had only one parent working outside the home. Today, roughly two-thirds of married couples with children rely on the earnings from two workers to make ends meet. However, the so-called “marriage penalties” in the tax code, along with income phase-outs for the EITC and spending programs, and additional costs incurred when both spouses work (such as child care) can result in extremely high tax rates on additional earnings by many low- and middle-income American families.
For example, under the current federal tax and transfer system, a family headed by a primary earner making $25,000 per year can take home less than 30 percent of a secondary worker’s earnings. In other words, the effective tax rate on the secondary worker’s earnings is as high as 70 percent. In the worst of cases, these realities can discourage a potential second earner, typically a mother considering re-entry into the workforce, because the costs of working are just too high.
Behind Senator Murray’s legislation and the work of The Hamilton Project is a belief that too many hard-working American families live in economically precarious situations, weaving in and out of poverty and unable to grasp the secure reigns of the middle class. Indeed, this “struggling lower-middle class” consists of the 30 percent of working-age families with children who have income between roughly $15,000 and $60,000. Though not officially poor, these families are economically insecure and are living one major setback away from poverty.
The 21st Century Worker Tax Cut Act would help “make work pay” for low- and middle-income families by allowing a 20 percent deduction on a secondary earner’s income. In order to qualify, both spouses must earn income during the year and the couple must have at least one child under the age of 12. (For detailed background, see the secondary earner deduction proposal by Melissa Kearney and Lesley Turner.) Importantly, this new deduction also reduces earned income for purposes of calculating the EITC. This helps ensure that low-income, two-earner families who do not owe income tax and would not benefit from the deduction —because their combined income is too low—instead benefit through an enhanced refundable EITC.
A founding principle of The Hamilton Project’s economic strategy is that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth in a changing global economy. By reforming the tax code to reflect the challenges and realities facing today’s American families, we offer working Americans an opportunity to take home more of their earnings while providing struggling families a path to a secure middle-class livelihood.