[Congressional Record Volume 141, Number 160 (Tuesday, October 17, 1995)]
[Extensions of Remarks]
[Pages E1952-E1953]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            TAMING THE EITC

                                 ______


                           HON. NEWT GINGRICH

                               of georgia

                    in the house of representatives

                        Tuesday, October 17, 1995

  Mr. GINGRICH. Mr. Speaker, I would like to share with my colleagues 
an excellent article regarding the Earned Income Tax Credit.

                            Taming the EITC

       The Earned Income Tax Credit often is hailed by Republicans 
     as the best welfare program around. So why are they bent on 
     cutting it? The answer: It has grown so much that it's now 
     doing more harm than good.
       House Ways and Means Committee Chairman Bill Archer, R-
     Texas, hopes to cut the EITC some $20 billion over the next 
     seven years.
       President Clinton sharply attacked the move, saying it's 
     ``inconsistent with those basic, bedrock values this country 
     should be standing for.''
       What's all the fuss about?
       Started in 1975, the EITC was supposed to help offset the 
     growing costs of payroll taxes on the working poor. Those 
     eligible could get a credit on a portion of their income 
     taxes.
       For some families below a certain income threshold, the 
     EITC worked as a negative income tax. They paid little or no 
     income taxes to begin with.
       The idea was to encourage work among the poor by boosting 
     their after-tax income. So the EITC has come to be seen as a 
     welfare program with a built-in work incentive.
       Popular with both Republicans and Democrats, the cost of 
     the credit grew rapidly. Presidents Bush and Clinton both 
     expanded the credit's size and scope dramatically.
       So much so, in fact, that when the Clinton expansions are 
     fully phased in next year, the EITC's cost will have nearly 
     quadrupled since 1990. By 1996, the credit will cost $26 
     billion--equal in size to the federal food stamp program.
       As a modest program, the EITC worked fine. But most 
     economists agree that today it's doing more harm that good.
       The problem stems from the way the credit is structured.
       It gets phased in for working families with income up to 
     $8,900. The effect of the credit is to provide a wage subsidy 
     of 40 cents on each dollar up to that income limit.
       From there, the credit is maxed out. Families who earn up 
     to $11,600 don't get any additional credit.
       Once a family exceeds that limit, the credit is phased out. 
     For each dollar over $11,600, the family loses 21 cents of 
     its EITC until its income hits $28,000.
       Economists say this acts like a marginal tax rate of 21 
     percent, on top of all the other state and federal taxes, 
     giving these families one of the highest marginal rates 
     around. And that, they say, provides a strong distinctive to 
     work.
       The trouble is, as the EITC expands, this disincentive 
     looms larger, overwhelming the work incentives created when 
     the credit is phased in.
       Marvin Kosters, who has done extensive research on the EITC 
     for the American Enterprise Institute, finds that today about 
     40 percent of American families are eligible for the credit.
       But of these, there are nearly four times as many families 
     in the phase-out range as in the phase-in range.

[[Page E 1953]]

       Worse, the work incentives for families in the phase-in 
     range are mixed, Kosters notes. For example, the EITC 
     encourages low-income families to work, rather than not--the 
     so-called substitution effect.
       But it also encourages them to work less. After all, they 
     get a 40-percent raise without working any harder.
       And, Kosters notes, the EITC imposes a marriage penalty on 
     low-income workers--a problem made worse by the expansion of 
     the credit in the '90s.
       ``Under the most adverse circumstances, the marriage 
     penalty would amount to over $5,000,'' Kosters said before a 
     House panel looking at the EITC. ``(That) would be about 25 
     percent of the combined income of the married couple.''
       And, as the EITC becomes more generous, it invites fraud 
     and abuse, which has been the focus of GOP complaints. Audits 
     by the IRS have found higher rates of false or exaggerated 
     EITC claims.
       For now, the GOP appears to be listening to these concerns.

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