President Clinton's Plan to Expand the Earned Income Tax Credit

PRESIDENT CLINTON PROPOSES TO EXPAND THE EARNED INCOME TAX CREDIT IN ORDER TO INCREASE THE REWARD FOR WORK AND FAMILY

Revised: February 7, 2000

Today President Clinton Will Announce His $24 Billion Plan to Expand the Earned Income Tax Credit – A Key Part of His "New Opportunity Agenda." The President’s proposed expansion of the Earned Income Tax Credit (EITC) would provide tax relief for 6.8 million hard-pressed working families. The expansion would cost $24 billion over 10 years.

Building on the Successes of the 1993 EITC Expansion. In 1993, the President signed into law the largest EITC expansion ever to provide a tax cut for 15 million working families while rewarding work and family. Today, the success of the EITC in reducing poverty and encouraging work is clear:

The President’s Proposal Increases the Reward to Work and Family in Four Ways:

  1. Expand the Maximum Credit for Working Families with Three or More Children By $500. This would provide a tax break for 2.1 million low- and moderate-income working families. This expansion is targeted at the highest concentration of child poverty: in 1998 the poverty rate for children in families with three or more related children was 28.5 percent – more than twice the 11.9 percent poverty rate for children in families with one or two related children.
  2. Expand the Credit for Married, Two-Earner Couples. This would benefit over 1.3 million married filers. For married, two-earner couples, this provision by itself would provide an average tax break of $250.
  3. Increase the Reward to Work While Expanding the Credit for Families with Two or More Children. This would provide an additional tax break, and an additional incentive to work, for families with two or more children by lowering the phaseout rate to give more rewards to families struggling to work their way into the middle class.
  4. Encouraging Savings Through Simplification. Currently, unlike the rest of the tax code, the EITC does not reward many of the families that contribute to 401(k)’s. This proposal changes that in order to encourage savings and simplify the calculation of earned income for the purposes of the EITC.

Here is How These Changes Would Increase the Reward to Work for American Families:

THE PRESIDENT’S PROPOSED INCREASE IN THE EARNED INCOME TAX CREDIT

 

Pre-1993 Law

Current Law

Proposal

Increase

Married*; 2 children; $20,000 earnings

$1,438

$2,524

$2,940

+$416

Individual; 3 children; $15,000 earnings

$2,331

$3,577

$4,116

+$538

Married*; 3 children; $23,000 earnings

$902

$1,892

$2,867

+$975

*Both spouses must earn at least $725 to qualify for the additional credit for a married couple.

DETAILS OF THE PRESIDENT’S PROPOSAL

 

The President’s Proposal Would Expand the Earned Income Tax Credit to Provide Tax Relief for 6.8 Million Hard-pressed Working Families. The average increase for families with three or more children is $544 and some married couples with three or more children could see as much as an additional $1,155 tax credit. The expansion will cost $24 billion over 10 years. The four major provisions of President’s EITC expansion are:

  1. Expand the Maximum Credit for Working Families with Three or More Children By $500. The President’s proposal would add a "third tier" to the EITC to expand benefits for families with three or more children. Very low-income families will get 45 cents for every additional dollar they earn – compared to 40 cents under current law. This higher credit rate will increase the maximum credit for a family with three children in 2001 from $3,992 to $4,491 – a roughly $500 increase. This proposed new "tier" of the EITC is motivated by the fact that 60 percent of all poor children – 7.7 million children – are in families with three or more children. Adding a third tier to the EITC would provide a tax break for 2.1 million low- and moderate-income working families.
  2. Expand the Credit for Married, Two-Earner Couples. The President’s proposal would allow married couples to earn an additional $1,450 more before beginning to have their EITC phased out. For example, in 2001 a married, two-earner couple with children would be able to earn up to $14,480 and still receive the maximum EITC, as compared to the $13,030 threshold under current law. The result of this provision would be to provide an additional $250, on average, for married, two-earner couples. This provision would benefit over 1.3 million married filers.
  3. Increase the Reward to Work While Expanding the Credit for Families with Two or More Children. The third provision of the President’s proposal would provide an additional tax break, and an additional incentive to work, for families with two or more children. Under current law the EITC for these families is reduced by 21.06 percent for each dollar they earn above the maximum threshold. The President’s proposal would lower this phase-out rate to 19.06 percent – a tax break for 5.4 million of America’s hard-pressed working families.
  4. Encouraging Savings Through Simplification. Under current law, 401(k) contributions and other forms of nontaxable earned income are counted as income in computing the EITC. The President proposes to encourage savings for poor people by eliminating nontaxable earned income from the calculation of the EITC. This will increase the rewards for retirement savings for many families, resulting in a larger credit for many families currently contributing o 401(k) plans. In addition to encouraging savings, this step will simplify the EITC, and continue to increase compliance.

THE PRESIDENT’S 1993 EITC EXPANSION HAS CONTRIBUTED TO THE LARGEST REDUCTION IN POVERTY IN OVER THREE DECADES

 

 

THE EVIDENCE IS OVERWHELMING THAT THE EITC ENCOURAGES WORK




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