Hamilton Project Paper Release Leads to Spirited Discussion on Tax Code Reform

— By Rae Tamblyn, Research Assistant —

Coffee in hand and Twitter open on my phone, I sat down to listen to former Treasury Secretary Bob Rubin open the Hamilton Project’s newest release of working papers. As he prepared to turn the discussion to Melissa Kearney and Lesley Turner of the University of Maryland on their working paper proposing tax reforms, he concluded by noting there is “a fine line between ‘lower-middle income’ and ‘low-income’. No matter how you word it, it’s hard right now.” We agree completely.  And that line is potentially thinner than you might think. The CSBG Network is acutely aware that on paper, someone might be in the “lower-middle income” bracket, but still be living the reality of a low-income household.

For a very specific segment of the population, here is one reason why:

As Kearney and Turner lay out, the earned Income Tax Credit (EITC) discourages work among married couples as a result of how the tax code sums income. By summing income, taxes on the total income end up costing the second earner over 60 percent of their income, since it is treated as a net value instead of an individual earning.

In order to qualify for support programs, it’s necessary to be at a certain level of the Federal Poverty Guideline. Let’s say a spouse gets a job. Summed income means the family faces increased expenses as they move out of eligibility range for some programs. So for example, a household with two incomes could see over 10 percent of their income go towards childcare costs that used to be subsidized. Often, the increase in expenses outweighs the increase in new income. While appearing in a higher income bracket on paper, in reality the family must deal with a net loss of available income as a result of increased employment. Kevin Hassett from the American Enterprise Institute specifically noted this issue facing lower income earners, saying, “If you don’t work, you get supports from ‘welfare-type support programs’.  If you work, you don’t see return on your work, and you lose the supports.”

The working proposal for tax reform that Kearney and Turner laid out in a brief presentation is certainly not going to alleviate the problems in the tax code, but would definitely be a start to mitigate this specific issue facing married, dual-income, lower-middle class households with at least one child. In sum, Kearney and Turner support a proposal for a secondary earner tax deduction to help “make work pay” for both spouses in low-income households. The proposed tax reforms would reduce the penalty on the secondary earner, keeping more money in the home, incentivizing work, and potentially helping to make self-sufficiency a reality for more dual-income households.