There is growing recognition among both Republicans and Democrats that American families deserve more support. Yet, for too many low-income Americans striving to build a better life for their families, key provisions of the federal tax code penalize hard work and marriage, creating barriers where there should be reward. The ongoing discussions about tax reform present an opportunity to introduce reforms that are both pro-work and pro-family.
The Earned Income Tax Credit is one of the largest sources of support for low-income families, but it could be streamlined and paired with changes to the Child Tax Credit so that the two credits are better structured to accomplish the dual goals of rewarding work and providing income support to families with children.
The Earned Income Tax Credit currently provides a maximum of $7,830 a year for qualifying families with three children. Families receive no money from the program if they have no earnings. The credit then increases at low levels of earnings to encourage work. It also increases as the number of children in the family goes from one to two to three. An unintended, undesirable feature of this design is that the “pro-work” incentives of the Earned Income Tax Credit are stronger for families with more kids — exactly opposite to common sense ideas of family wellbeing.
Families with more kids likely benefit from more parental time at home. In addition, because the earnings eligibility limits do not double for married couples, the Earned Income Tax Credit discourages marriage among working low-income parents and makes it harder for married couples to get ahead by adding a second earner.
Such “marriage penalties” are found throughout the tax code. Since the progressive U.S. tax code is applied to combined household income, couples who marry can be subject to a higher overall tax rate and potentially reduced government benefits.
The Department of the Treasury estimates that in 2023, 37 percent of married couples filing jointly faced a marriage penalty. Although couples can legally file separately, they rarely do, as it also almost always leads to a higher tax burden and it precludes the claiming of many tax credits, including the Earned Income Tax Credit.
According to research from the Federal Reserve Bank of Atlanta and Boston University, over 7 percent more low-income women with children would marry by age 35 without this marriage penalty.
But it doesn’t have to be this way. As Congress is poised to implement major changes to the U.S. tax system, we urge lawmakers to adopt a more coherent, pro-family approach to tax policy. The current tax debate presents a golden opportunity to address and modernize some of the system’s most outdated features.
We propose modifications to the two main federal tax credits affecting low-income families. Specifically, we propose a unified Earned Income Tax Credit that applies to any family with children. We scale the credit size and income eligibility for married couples so that fewer families see their benefits reduced when they marry or a spouse starts to work.
To ensure that low-income families with children are not left worse off under these changes, we pair these Earned Income Tax Credit reforms with an expansion of the Child Tax Credit. The enhanced Child Tax Credit would provide greater support to families raising young children and help offset the rising costs of caregiving and childrearing.
To ensure even the lowest-income children have access to support, families with no earnings are eligible for half of the proposed Child Tax Credit. Our proposal increases Child Tax Credit benefits quickly as parental earnings increase, providing an incentive for parents to enter the workforce.
Our proposed changes prioritize low- and middle-income American families, with 58 percent of the increases in transfer payments going to families in the bottom two-thirds of the income distribution. These changes would update the U.S. tax code to be both pro-family and pro-work, supporting working parents, reducing marriage penalties, and providing impactful support to children in low-income households.
At a time when there is growing bipartisan interest in better supporting children and working parents, these changes offer a clear path forward. With modest adjustments, we can create a tax system that promotes family stability, encourages workforce participation and helps more families build secure, thriving futures.
Melissa S. Kearney director of The Aspen Economic Strategy Group and Luke Pardue is policy director of The Aspen Economic Strategy Group.
