Tax Policy and Poverty

Poverty in America

Poverty in America is on the rise. The most recent data from the U.S. Census shows that 13.5 percent of the U.S. population, or 43.1 million people, lived in poverty in 2015. This level is up from 12.5 percent in 2007 and the highest number of people in poverty on record. Furthermore, a Supplemental Poverty Measure (SPM), which factors in costs not counted by the official Census data such as medical costs, taxes, and income variations by region, shows the poverty rate to by much higher. The SPM lists the 2015 poverty rate at 14.3 percent or 45.7 million Americans living in poverty.

Although many factors go into the determinations of who falls above or below the poverty line, income (or lack thereof) is a key factor for rising poverty in the U.S. The Census data shows that the 2015 median household income, at $56,516, an increase of 5.2 percent from the 2014 median income in real terms. This was the first annual increase in median household income since 2007, the year before the recession. With the rising costs of health care, food, and with many people unable to find employment opportunities, it is easy to see why Americans are falling into poverty and why people in poverty are finding it hard to get out.

Income is one of the keys to a poverty-free life. The money we earn not only helps us meet the necessities of daily life, it also helps us build wealth. Wealth can take many forms, from savings to a home to a business to investments. As a person's wealth grows, their poverty (or likelihood of becoming poor) decreases. Therefore, increasing income and wealth are key methods in ending poverty.

Why Taxes Matter in Reducing Poverty

Taxes have a direct impact on income. While many people view taxes as a means to reduce their income, fairly or unfairly, for low-income individuals and families, tax policy can be a very constructive tool for increasing income. RESULTS strongly supports tax policies that work to help lift and keep people out of poverty. These include expanding tax credits to reach more people in poverty and investing more resources in policies that help low-income persons build wealth. We also support a fair tax code that benefits everyone and is used to help create wealth, rather than concentrating it.

Increasing Income with Low-Income Tax Credits

Fortunately, there are tax credits that are specifically targeted to low-income individuals and families. The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are two key provisions that are used to help low and moderate income persons increase their household income. What makes these credits so helpful in combating poverty is that they are refundable. This means that even if a person has little or no income tax liability, he/she can still receive a refund check from the IRS. Refundable tax credits are essential in helping people living in poverty increase their income level. However, they do not reach all low-income persons. RESULTS is therefore working to expand these credits so that more low-income persons can take advantage of them. See our EITC and CTC pages for more details about these important anti-poverty tools.

It should also be noted that, despite claims by some politicians, low-income Americans pay taxes. It is true that many low-income people do not pay federal income tax, either because they earn so little in wages to incur income tax liability or because they are unable to work. However, they still pay taxes. Everyone who works pays payroll taxes for Social Security and Medicare, and everyone pays sales tax on the goods we buy, property taxes on our homes and cars, and other state and local taxes. A report from Citizens for Tax Justice shows that while the lowest-income Americans do pay the smallest share of their income in federal income taxes, these people pay the largest share of their income in state and local taxes, at 12.2 percent in 2016. This is in contrast to the 8.6 percent paid in state and local taxes by the top 1 percent earners during that same year.

Building Savings and Assets

Having access to saved income or other assets (e.g. a home) creates stability in a person's financial life. The U.S. tax code makes significant investment in savings and asset development. Unfortunately, these policies, such as the mortgage interest deduction and low rates on investment income, primarily benefit middle and upper income households.  Policies and programs aimed at increasing savings and assets for the poor are limited and are not available or used by the vast majority of low-income persons in the U.S. By expanding asset development programs for the poor, we can help low-income persons build the wealth necessary to lift themselves out of poverty. These policies include establishing children's savings accounts (e.g. the ASPIRE Act) and expanded opportunity for people to create Individual Development Accounts (IDAs). It can also include using the tax code to promote savings through the Financial Security Credit and the Saver's Credit. These latter policies are particularly appealing because they use the existing IRS infrastructure to facilitate the process. This streamlines enrollment thus increasing the likelihood people will take advantage of the programs. See our Building Savings and Assets pages for more details about low-income asset development.

Closing the Wealth Gap

The U.S. tax code has changed dramatically over the last four decades. Where once the federal income tax was designed to be progressive, i.e. higher income earners paid higher taxes, this progressivity has seen a sharp reversal. Recent tax cuts have been written to allow more of the benefits to flow toward the top, which have contributed to huge income and wealth inequalities between rich and poor. Right now, the richest 10 percent of Americans own 75 percent of all U.S. wealth (the richest 1 percent own 35 percent) and the gap between rich and poor is the largest in a century. This income and wealth gap not only makes it harder for middle class and low-income Americans to get ahead, it retards the growth of our economy making recessions longer and expansions shorter. Finally, tax cuts have contributed to record federal deficits, which in turn are used as excuses to cut vital programs that help low-income communities. We are seeing this play out in Congress as lawmakers demand cuts to safety net programs for deficit reduction, while protecting reckless and unnecessary tax cuts for the wealthy. Current tax policy is literally making the rich richer and the poor poorer.