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Should Poor Families Be Given Tax Relief On Their Social Security FICA Tax? Spoiler Alert . . .

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It’s already been done.

Or at least, depending on your point of view.

Here’s the scoop:

The Earned Income Tax Credit is a federal benefit paid to low-income workers, with benefits varying by family size. Unlike SNAP/food stamps and similar benefits, it is intended as a work incentive by paying benefits only to the working poor, as a percent of income up to a cap. For example, a poor taxpayer/couple with two children receives a credit of 40% of their earnings up to a maximum of $5,980, at which point it gradually phases out until the credit is totally eliminated at an income of $42,000. Benefits are primarily targeted at families with children, but very poor childless taxpayers receive up to $543, or, temporarily due to the American Rescue Plan Act, $1,502. This tax credit is fully refundable, which means that for taxpayers who do not owe any income tax at all, or owe less than the value of the EITC, they are paid out the value of the credit, or what’s left of it. (Some helpful links are at the Tax Policy Center, which includes a nice visual; the National Conference of State Legislatures, which provides information on state versions of the benefit as well; and, of course, the IRS itself.)

And, as it happens, the EITC is approaching its 50th birthday, having made its first appearance in 1975, as a temporary benefit, part of a tax cut package intended as economic stimulus, alongside other credits, rebates, and exemptions. It was then extended multiple times and made permanent in 1978. (See “The Earned Income Tax Credit (EITC): A Brief Legislative History,” prepared by the Congressional Research Service.)

What was the purpose of the credit? In some respects, just as now, it was simply meant to aid poor families. But if we phrase the question a bit differently and ask, what was the rationale behind the credit, we have our answer straight from the legislation-authors themselves:

“The credit is set at 10% [of the first $4,000 in income] in order to correspond roughly to the added burdens placed on workers by both employee and employer social security contributions.” ($4,000 in wages in 1975 is equivalent to about $26,000 now, when adjusted for wage increases over time and the FICA tax rate at the time was 5.85% each for employer and employee.)

Of course, this has long been forgotten, even as the EITC itself has increased in value over the years, and benefits for childless individuals added.

And in the meantime, politicians and policy experts debate whether Social Security is a regressive tax because the wage ceiling caps the tax that the highest earners pay. Here’s the Center for Budget and Policy Priorities:

“Social Security’s payroll tax is regressive, because of its flat rate and its cap, so low- and moderate-income taxpayers pay more of their incomes in payroll tax than do high-income people, on average.”

So how should this bit of history affect how we think about our current taxes and benefits for the poor? Should the fact that the EITC credit was originally designed to offset the FICA/Social Security tax for the poor have any wider significance in future discussions of Social Security benefits and taxes, or is this a mere historical curiosity? Was the offset of Social Security taxes ever even “real” in the first place, since it only ever served as a rationale for the credit rather than having been written into the formula for the tax directly?

This may seem to be a historical curiosity of no future relevance, but, with reports that the Build Back Better bill is dead in its current form, and with debates likely to come on provisions such as the Child Tax Credit, the expanded EITC, and, eventually, Social Security funding itself, we would do well to bear some of this history in mind.

As always, you’re invited to comment at JaneTheActuary.com!



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