Making the tax code work for the middle class

A few weeks ago at a congressional hearing, Gene Steuerle pointed out that the design of our tax code and safety net can result in low-income households facing high effective marginal tax rates. For example, Steuerle finds that a household whose income rises from $10,000 to $40,000 would actually face a nearly 30 percent marginal tax rate.  Factoring in the loss of safety net benefits like nutrition assistance, health insurance coverage, and other program benefits translates into an 82 percent marginal rate. In other words, a household making $10,000 that gets a raise of $30,000 would end up only $5,400 better off.

This happens because much of our social safety net is means tested, meaning that benefits phase out as household income rises. A simple way to solve this problem is to delay the phase-out and extend the schedule, making the benefit in question phase-out more slowly. This would not only tear down the high marginal rate wall between low-income and middle class taxpayers, but would also help middle-income households who have too much income to benefit from social safety net programs but too little income to utilize many of the tax breaks that the tax code provides disproportionately to high-income households.

Robert Cherry, a Professor of Economics at Brooklyn College, has recently laid out a tax proposal in Tax Notes that would focus its effect on married couples with young children. The New Mothers’ Tax Relief (NMTR) would provide an alternate Earned Income Tax Credit (EITC) schedule for families with one or more qualifying children (up to preschool age). It would significantly increase the amount of new working married parents eligible for the maximum credit, delaying the beginning of the phase-out until $40,000 (from the current $21,770). The tax credit would also phase out more slowly, at a 6 percent rate instead of a 15 percent rate, meaning that working married parents up to $91,600 in household income would be eligible for the NMTR credit, albeit at a reduced amount.

Now, it should be noted that this proposal mainly benefits married couples with young children, providing significantly lower benefits to single parents or married couples without children (the maximum benefit is extended to $19,000 with a 12 percent phase-out). This feature, however, makes the proposal cheaper—Cherry estimates it would cost $15 billion a year if limited to households with children under the age of 6. It also helps reduce the steep marriage penalty that low-income mothers face: If a working mother with one child making between $15,000 and $20,000 marries a man making over $25,000, practically all her EITC credit will be lost. But the fact that it encourages marriage and targets its benefits at families with young children can’t hurt its political prospects.

Correction: This post was updated to reflect the fact that the NMTR does include a small benefit for single mothers.  A previous version had stated that it only benefited married couples.  Apologies to Robert Cherry for the confusion.