January 24, 2008
Reading Assignment for
Tuesday, January 29
• Rich Williams (SOC) and Judy Fox
(LAW)/Foreclosed and Abandoned
Houses in SB/ Changing Face of
Inequality, available at:
– https://www3.nd.edu/~rwilliam/ndonly/rwpubs/Soci
alProblems2005.pdf; or
– http://www.nd.edu/~jwarlick/courses/html
Extra Credit Event
William Julius Wilson Lecture:
Poverty and Inequality in Urban America
Sunday, Jan. 27th,
7:00 pm,
101 Debartolo Hall!!
Outline for today
• Turn in papers
– Observations about our public opinion poll?
• A quick quiz
• Questions about Professor Betson’s lecture
• A few more comments about Measuring
poverty
• Ch. 1, What’s the point?
• Taxes and the poor, featuring the EITC
Turn in your papers now!
• Pass to someone on the aisle.
Quick Quiz
1. Indicate whether the following
statement is true or false:
– “The U.S. is the only country to adopt an
official (government authorized) poverty
measure.”
A. True
B. False
Questions about Betson Lecture?
• Mollie Orshansky’s obituary is posted on my
web site http://www.nd.edu/~jwarlick
• Also see http://www.ssa.gov/history/orshansky.html
• Economists contribution: development of
equivalence scales
– “a means to allow for the comparison of the poverty status of families of
various sizes and compositions”
– See: http://www.irp.wisc.edu/research/method/oakvos.htm
• Betson’s methods -- microsimulation with
cross-sectional surveys of American
households
A bit more about Measuring Poverty
•
International Poverty Line, $1-per-day
http://earthtrends.wri.org/images/pop_fea_dimofpov_fig4.jpg
•
Alternatives to income-poverty:
multidimensional indexes of poverty focused
on capabilities
– Amartya Sen, Nobel Prize winner, 1999
Capability Deprivation
• . . . In analyzing social justice, there is a
strong case for judging individual advantage
in terms of the capabilities that a person has,
that is the substantive freedoms he or she
has to lead the kind of life he or she has
reason to value. In this perspective, poverty
must be seem as the deprivation of basic
capabilities rather than merely as lowness of
incomes. . .
– Amartya Sen, “Poverty as Capability Deprivation,”
Development as Freedom (New York: Anchor Books, 1999).
World Bank definition of the
dimensions of poverty
•
•
•
•
Income poverty--material deprivation
Health and education
Vunerability--exposure to risks
Voicelessness and powerlessness-exclusion from political processes
• http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPO
VERTY/0,,contentMDK:20194762~pagePK:148956~piPK:21661
8~theSitePK:336992,00.html
Implications for
Development Policies
• Development should not focus solely on
raising incomes/consumption to reduce
material deprivation, but also on
enlarging people’s choices.
• Progress should not be measured in
economic terms alone.
Is it feasible to measure poverty
using Sen’s definition?
•
Human Development Index
– http://hdr.undp.org/en/
– http://en.wikipedia.org/wiki/Human_Devel
opment_Index#Top_thirty_countries
What’s the point of Chapter
1?
“Money and Its Opposite”
2. Which of the following best expresses your
answer to the question above:
A.
B.
C.
D.
To show adults in working poor families behave
unwisely
To show that the choices available to the working
poor are constrained relative to those with greater
economic resources
To emphasis that the working poor face higher
prices in financial markets and that these higher
prices make it difficult for them to obtain basic
necessities
None of the above
Your thoughts
Taxes and the Working Poor
Presentation 5
January 24, 2008
Do the working poor pay taxes?
• Payroll taxes
• Income taxes: Federal, State County, and local
• Sales taxes:
– State and Local
– 6% in Indiana
• Property taxes
– collected by the local county treasurers,
– based on assessments that are provided by the township
and county assessors
– Range from 2 to 3% in South Bend
Payroll Tax
• Tax Base: Earnings (wages and salaries)
• Tax individually paid by both employer and employee:
– OASI Portion: 6.2% of first $94,200 of Earnings
– HI Portion: 1.45% of Earnings
Payroll Taxes
Tax
($)
OASI + HI
OASI
HI
$94,200
Earnings
Income Tax
• Income
– Income Preferences -- Special Treatment of Certain Types of Income
– Adjustments to Income
• Adjusted Gross Income
– Deductions from Income
Standard (single) $5,150 or (married) $10,300)
Itemized Deductions:
–
–
–
–
–
Medical and Dental Spending
Taxes Paid to other levels of Government
Interest Paid (Homes and Investments)
Gifts to Charity
Job Expenses, Thief Losses, Other
– Personal Exemptions ($3,300 per member)
•
•
•
•
Taxable Income
Gross Tax Liability
+ Tax Credits (EITC$$$$)
Net Tax Liability
Tax Credits
• Different kinds of tax credits
– Child- and dependent-care credit
– Credit for the elderly or disabled
– Retirement savings contributions
credit
– Adoption expenses credit
– Hope and Lifetime Learning education
credits
Tax Credits, cont.
• Even better than deductions?!?
– Deductions reduce your amount of
taxable income
– credits cut your actual tax bill, dollarfor-dollar
Tax Credits, cont.
• Non-refundable vs. Refundable credits
– Nonrefundable credits can take your tax
down to nothing, but you can't get money
back from the government
– Refundable credits may eliminate any tax
you owe and provide you with a refund$$$
• Earned Income Tax Credit is a refundable
tax credit targeted at the working poor!!!!!
Tax Rates Terms
• Marginal Tax Rate -- if you earn one
more dollar, what percent of that
additional dollar do you pay in taxes?
Marginal Federal Tax Rates
Lower Income Limit
on Taxable Income:
MRT
Single
Married
10%
15%
25%
28%
33%
35%
0
$7,550
$30,650
$74,200
$154,800
$336,500
0
$15,100
$61,300
$123,700
$188,450
$336,500
Tax Terms, cont.
• Average Tax Rate -- what percent of
your income do you pay in taxes?
Average Federal Tax Rates of
U.S. Households, 2001 and 2004
Lowest 20%
Second 20%
Middle 20%
Fourth 20%
Highest 20%
Top 1%
2001
2004
5.4
11.6
15.2
19.3
26.8
30.1
5.2
11.1
14.6
18.5
23.8
25.6
Upper income
limit 2004
$18,486
$34,675
$55,230
$88,002
LL: $150,499
Sources for Previous Slides
• Congressional Budget Office, Effective Federal Tax
Rates under Current Law, 2001 to 2014 (Washington,
D.C.: Congressional Budget Office, August 2004),
table 2.
• U.S. Census Bureau, Income: Historical Income
Tables--Households, Table H-1: Income Limits for
Each Fifth and Top 5 Percent of Households, All R
aces, 1967 to 2006. Available at
http://www.census.gov/hhes/www/income/histinc/h01
ar.html
Tax Equity Terms
Based on Average Tax Rates
• Regressive -- Falling Average Tax Rate
– Examples: OASI payroll tax
– Sales taxes: As income rises, you spend less
• Proportional -- Constant Average Tax Rate
– Example: HI payroll tax, property tax
• Progressive -- Rising Average Tax Rate
– Example: Income Tax
• All taxes considered, the US Tax system is
progressive!!!
What means-tested welfare programs are
available for poor people in the U.S.?
• Federal and State governments funded 85
welfare programs in FY 2002 at a total cost
of $522 billion.
– Federal Share: 71%
– State and Local Share: 29%
• The means-tested programs fall into 8
different categories.
(Source for this and the next 2 slides : House Ways and Means
Committee 2004 Green Book,
http://www.gpoaccess.gov/wmprints/green/2004.html )
Understanding the EITC
Eight Categories of Welfare Programs
and Total Costs, 2002
– Medical Aid: $282 billion, 54%
– Cash Aid: $102 billion, 20%
– Food Aid: $39 billion, 7%
– Housing Aid: $36 billion, 7%
– Education Aid: $30 billion, 6%
– Other Services: $22 billion, 5%
– Jobs and Training Aid: $8 billion, 2%
– Energy Aid: $2 billion, 0.3%
7 largest programs by amount spent
•
•
•
•
•
Medicaid ($258 billion)
SSI ($39 billion)
EITC ($28 billion)
Food Stamps ($24 billion)
TANF cash, ,services, child care, and work
activities ($24 billion)
• Section 8 low-income housing assistance
($18 billion)
• Pell Grants ($11)
Learn more about the EITC
• Greenstein, “The Earned Income Tax Credit: Boosting
Employment, Aiding the Working Poor,”
http://www.cbpp.org/7-19-05eic.htm
• Jason A. Levitis and Nicholas Johnson, “Together,
State Minimum Wages and State Earned Income Tax
Credits Make Work Pay,” http://www.cbpp.org/7-1206sfp.pdf
• DeParle, Ch. 17: Money: Milwaukee, Summer 1999
Additional Sources
• A. Nagle and N. Johnson, “A Hand Up: How State Income Tax
Credits Help Working Families Escape Poverty In 2006,” Center
for Budget and Policy Priorities, www.cbpp.org
• S. Holt, “The Earned Income Tax Credit at Age 30: What We
Know,” The Brookings Institution, February, 2006
http://www.brookings.edu/metro/pubs/20060209_Holt.pdf
• Citizens for Tax Justice, “The Hidden Entitlements,” 1996
http://www.ctj.org/hid_ent/part-3/part3-3.htm
• Ifie Okwuje and Nicholas Johnson, “A RISING NUMBER OF
STATE EARNED INCOME TAX CREDITS ARE HELPING
WORKING FAMILIES ESCAPE POVERTY,” Center for Budget
and Policy Priorities, October 20, 2006 http://www.cbpp.org/1012-06sfp.pdf
EITC Questions
•
•
•
•
•
•
What is the EITC and how does it work?
Who receives the EITC?
How large are the credits?
Which States supplement the credit?
Why is the EITC politically popular?
Will this popularity last?-- problems with
the EITC
What is the EITC
and how does it work?
• A tax reduction and wage supplement for low- and moderateincome families
• Available to both single parent, two parent families, and
childless low-income workers
• Must work to be eligible
• A refundable credit, which means that if the credit amount is
larger than a family’s income tax bill, the family receives a
refund check equal to the difference.
• Usually claimed when the income tax return is filed. Can opt for
equal monthly payments.
Source: Tax Policy Center, Joint effort of the Urban Institute and
Brookings Institution
http://www.taxpolicycenter.org/TaxFacts/TFDB/Content/PDF/eitc_parameters.pd
f
•Source: Together,State Minimum Wages and State Earned Income Tax Credits Make
Work Pay” Center for Budget and Policy Priorities, http://www.cbpp.org/7-12-06sfp.pdf
Example
• A single parent with two children working
nearly full-time--52 weeks per year at 38
hours per week--at the minimum wage of
$5.15 per hour has an annual income of
about $10,712. After subtracting $819 in
federal payroll taxes and adding the $4,285
federal EITC for which the family qualifies, the
family’s cash income totals $14,178, or
$2,064 below the 2006 poverty line for a
family of three ($16,242).
•
Source: Nagle and Johnson, 2006.
Who Receives the EITC?
• 5.4 million poor families with able-bodied
parents
– 3.3 million or 66 percent had at least one parent in
the labor force
– Among poor families with children in which one or
both parents worked anytime during the year, the
parents worked at combined 44 weeks.
– About 75 percent of the families on welfare
(TANF, SSI, or GA) had a parent working in 2004
Who Receives the EITC?
Source: Holt, 2006
Who Receives the EITC?
Source: Holt, 2006
Who Receives the EITC?
Source: Holt, 2006
How large are the credits?
Source: Nagle and Johnson, 2006
Source: Levitis and Johnson, 2006
Which States supplement
the federal credit?
• Nineteen States (counting the District of
Columbia as a State) supplement with
Federal EITC.
• A campaign is being waged to convince
the remaining States to do likewise.
Source: Okwuje and Johnson, 2006
Notes for previous table
Source: Nagle and Johnson, 2006
Why is the EITC
politically popular?
• Encourages work
– More people enter the labor force
– Workers work more hours
• Reduces welfare costs
– Grogger concluded that the EITC “may be the single most
important policy for explaining recent increases in work and
earnings and declines in receipt of cash welfare assistance
among female-headed families.”
Source: Greenstein, 2005
Why is the EITC politically
popular?, Cont.
• Reduces poverty
– By 4.4 million in 2003
– The poverty rate among children would be
1/4 higher without EITC
– Lifts more children out of poverty than any
other program
Will this popularity last?-problems with the EITC
• Fraud
– Overpayments to eligibles
– Fraudulent claims from ineligibles
• Nonparticipation
• Marriage penalty encourages cohabitation
– A two earner, two-child couple making $35,000
(with a 60/40% earnings split) can save $3,923 a
year in federal income taxes by avoiding marriage
(EITC: $4,400 vs. $476).
Will this popularity last?-problems with the EITC, cont.
• High cumulative marginal tax rates
– When earnings are in the phase-out range, the combined
marginal tax rates for the may create a substantial work
disincentive
• Federal income taxes
• Payroll tax
• EITC phase-out
15%
7%
21%
– Add a State income tax (3 to 6%) to this 43% marginal tax
rate if relevant.
– Add 24% phase-out rate for Food Stamps.
– Cumulatively the marginal tax rate face by low-income
Americans is in the range of 43- 73% !