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GOOD NEWS FOR Low INCOME FAMILIES:
EXPANSIONS IN THE EARNED INCOME TAX
CREDIT AND THE MINIMUM WAGE
December 1998
A report by
The Council of Economic Advisers
�EXECUTIVE SUMMARY
•
The strongest labor market in a generation has resulted in particularly large gains among·
low-wage and disadvantaged workers. From 1979 to 1993, the real wages of low-wage
workers fell sharply. Recently, however, low-wage workers have experienced large
increases in real wages: For low-wage men, wages are up since 1996 by 5.7 percent after
inflation. And for low-wage women, real wages have risen 6.1 percent.
.•
These strong wage gains have been accompanied by a steep decline in unemployment for
low-skilled workers. In 1993, 11.1 percent of workers without a high school degree were
unemployed; today that rate has fallen to 7.2 percent. Among high school graduates (with
no college), the rate has fallen from 6.6 to 3.9 percent. Low-wage workers are thus
gaining both by working more and by earning more for every hour that they work.
•
The effects of a strong economy have been reinforced by successful policies designed to
make work pay. Expansions in the Earned Income Tax Credit (EITC) since 1993 are
supplementing the incomes of low-wage working parents. The EITC is one of our most
. successful programs for fighting poverty and encouraging work:
Lifts more than 4 million Americans out of poverty. The EITC lifted 4.3 million
Americans out of poverty in 1997 -- more than double the number in 1993.
Dramatically reduces child poverty. In 1997, the EITC reduced the number of children
living in poverty by 2.2 million. This report finds that over half of the decline in child
poverty between 1993 and 1997 can be explained by changes in taxes, most importantly
theEITC.
Encourages work among single women with children. In 1992, 73.7 percent of single
women with children were in the labor force. In 1997, 84.2 percent of such women were
in the Jabor force. The percentage of single women with children who received welfare
and did not work has been cut by more than half -- from 19.3 percent in 1992 to 8.3
percent in 1997. Research studies suggest that the increase in labor force participation
among single mothers is strongly linked to the expansion in the EITC.
•
Increases in the minimum wage have been important in raising the earnings of low-wage
workers. Empirical research suggests that recent minimum wage increases have had little
or no adverse effect on employment.
.
•
The combined effects of the minimum wage and the EITC have dramatically increased
the returns to work for families with children. Between 1993 and 1997, families with one
child and one earner who worked full-time at the minimum wage (i.e., $4.72 in 1993 and
$5.15 in 1997, in 1997 dollars) experienced a 14 percent -- $1,402 -- increase in their
income, after inflation, just because of these two policies alone. Similar families with
two children experienced a 27 percent -- $2,761 -- increase in their income.
�GoOD NEWS FOR Low INCOME FAMILIES:
EXPANSIONS IN THE EARNED INCOME TAX CREDIT AND THE MINIMUM WAGE
1. The Labor Market Continues to Perform at a Record Pace
American workers are currently benefiting from the strongest labor market in a
generation. Employment is at an all-time high, with 132 million Americans at work in
November 1998, up from 119 million in January of 1993. Only 4.4 percent of the labor force is
unemployed, having fallen by 2.9 percentage points since this Administration took office; the
unemployment rate is now at its lowest level since 1969. Moreover, wages of workers are up
sharply in the past several years, with a ~ain in median wages (after inflation) of 4.4 percent from
1996 through August of this year. As this report indicates, these gains are particularly strong
among low-wage and disadvantaged workers, following more than a decade of labor market
losses. Administration policies have been, important in helping those at the bottom end of the
labor market begin to catch up and share in the overall economic growth of the 1990s.
2. Low-Wage and Disadvantaged Workers are Making Particuhirly Large Gains
Low-wage and disadvantaged workers have experienced substantial gains in wages and
employment. The real wages of Jow-wage male workers have shown large increases in the past
few years, in contrast to the period from 1979 to 1993, when they declined by 14.7 percent. (We
define low-wage as those workers at the bottom decile of the wage distribution.) Among low
wage women, the decline was 15.8 percent over this period. Charts 1 and 2 show recent
significant improvements in real 'wages among all workers, but with particularly large gains
among the lowest paid. Since 1996, 'men in the bottom decile have increased their earnings by
5.7 percent after int1ation (Chart 1), while women have gained 6.1 percent (Chart 2).
At the same time, unemployment rates among the least skilled have plummeted. When
this Administration took office in 1993, 11.1 percent of workers without a high school degree
were unemployed; today that rate has'fallen to 7.2 percent. Among high school graduates (With
no college), the rate has fallen from 6.6 to 3.9 percent. Hence, low-wage workers are working
more and earning more for every hour that they work.
Chart 1: Hourly Wages of Men Aged 16 and Over
16.----------------------------.
~ 14
21
"0
"012
Chart 2: t:lourly Wages of Women Aged 16 and Over
16,-----------------~---------,
50th decll. (median)
S;
O'l
~10 Q)
g'
?;
8
~
::l
o
:r: 6
1982
Note: 1998 flgur.ls the Januaty through August average,
1985
1988
1991
Note: 1998 figure is the January through August average.
1994
1997
�One group in particular -- single mothers -- has also experienced significant increases in
labor force participation during this time period. Labor force participation rates among single
mothers began to climb in 1993 after remaining essentially unchanged at 74 percent since 1984.
By 1997,84 percent of single mothers were in the labor force, a marked change for a group that
has traditionally had extremely high rates of poverty and welfare usage.
3. Administration Policies Have Played a Key Role in These Gains
The strong overall economy has been an important factor in increasing the wages and
employment of less-skilled workers. Typically, employment among workers with less education
is more sensitive to changes in the economy, with larger gains in recoveries and larger losses in
downturns. This Administration has worked hard to maintain an environment in which
economic growth can flourish and American businesses can compete fairly, both at home and
abroad. However, the strong economy is not the only reason for these gains among less skilled
workers. Administration policies to "make work pay" by expanding the Earned Income Tax
Credit and raising the minimum wage have also been important.
3.1 Expanding the Earned Income Tax Credit
Description of the EITC
The goals of the Earned Income Tax Credit (EITC) are to make work pay, to help ensure
that working parents do not have to raise their children in poverty, and to offset the total tax
burden of low and moderate income working families. As a result, the EITC eases the transition
from welfare to work. To achieve these goals, the EITC consists of a refundable tax credit for
working families with low incomes that offsets a family's total tax burden. Because the credit is
refundable, individuals can receive the full amount to which they are entitled even if the amount
exceeds the individual income taxes they owe. About 80 percent of EITC payments offset
individual income, social security, and other Federal taxes borne by families receiving the credit.
Only families that work are eligible for the tax credit, and the amount of the credit
depends on a family's labor market earnings. In 1998, for every dollar a low-income worker
earns up to an established limit, as much as 40 cents is added to compensation in the form of a
tax credit. In particular, the amount of the credit rises with earnings up to a maximum credit of
$2,271 for a family with one child and $3,756 for a family with two or more children. The credit
is flat for a range of earnings and then is phased out.
2
�The EITC was significantly expanded in
the Omnibus Budget Reconciliation Acts (OBRA)
4,000 , - - - - - - - - - - - - - - - - ,
of 1990 and 1993. As a consequence of these
expansions, the EITC now provides a greater
1998
'if
III
incentive f?r labor force participation than in
'63,000
'0
1993. In 1993, very low-income parents receive
an additional 19 to 20 cents for each additional
~ 2,000 :J
dollar earned. In 1998, a very low income parent
o
1993
~
with one child will receive 34 cents for additional
~ 1,000
earnings; if he or she has two children, the EITC
o
will add 40 cents.to their take-home pay (Chart 3).
OBRA 1993 significantly increased the
o
5,000 10,000 15,000 20,000 25,000 30,000
Earnings
credit for families with two or more children. The
Note: Credit amount depicted is for a family willl tw:> more children
maximum credit was increased by over $1,500
(1998 dollars), while eligibility for the credit was·
extended to families with incomes up to $30,050 (or about $3,600 above the prior law level). In
addition, the 1993 expansion helped lower taxes for 15 million working families in 1996.
About 19.7 million workers are expected to claim the EITC in tax year 1998, receiving an
average credit of $1,547. About 16.5 million of these claims will be for workers living with
children, who will receive an average credit of $1,807.
The EITC is a non-bureaucratic way to reward work effort. There are no middlemen
service providers, no long lines at government offices, and there is no need to take time off from
work to apply for the credit. Working families apply directly to the Internal Revenue Service for
.the EITC and generally receive the credit as parlof their tax refund.
Chart 3: The Earned Income Tax Credit in 1993 and 1998
~
r
Of
Participation in the EITC
While the EITC offers a substantial incentive to work and move out of poverty, the credit
is effective if low-inc.ome families apply for it. A relatively high fraction of families eligible for
the EITC -- 81 to 86 percent in 1990 -- have claimed the credit. l The participation rate has been
substantially higher than those for other antipoverty programs, including AFDC (62 to 72 percent
in 1986/87), and Food Stamps (54 to 66 percent in 1986/87).1
[Scholz, 1.K. (1994). "The Earned Income Tax Credit: Participation, Compliance, and
Antipoverty Effectiveness." National Tax Journal, 59-81.
2Blank, R. and P. Ruggles (1996). "When Do Women Use AFDC and Food Stamps? The
Dynamics of Eligibility vs. Participation." Journal ofHuman Resources, 57-89.
3
�The EITC has reduced poverty
Chart 4: Number of People Removed from Poverty
by the EITC
The EITC is targeted to families living in
5r-----------------------------~
poverty with the goal of lifting their income above
the poverty line. As shown in Chart 4, the latest
4
estimate from the Census Bureau shows that the
EITC removed 4.3 million persons from poverty in 5
1997, which is more than double the number who ~ 3
were removed from poverty in 1993.
~
5_2
,=
Over half of the people removed from
~
poverty by the EITC (2.2 million) were children
under the age of 18, and 1.8 million were living in '
families headed by unmarried women. Updating
analyses reported in the 1998 Ec;onomic Report of
o 1993
1994
.1996
1995
1997
the President, it is found that over half of the
decline in child poverty between 1993 and 1997 can be explained by changes in taxes, most
importantly the EITC (Table 1). In addition, the EITC removed about 1.1 million African
Americans and nearly 1.2 million persons of Hispanic origin from poverty in 1997. It is clear,
that the EITC has become a major weapon in our fight against poverty.
rJl
The EITC has increased the labor force participation of single mothers
Between 1993 and 1997, the real value of the maximum EITC payment increased by 38
percent for single mothers with one child and by 116 percent for single mothers with two or more
children. 3 These increases coincided with the period when the proportion of single mothers in the
labor force increased dramatically, from 73.7 percent in 11992 to 84.2 percentin 1997.
In contrast, the labor force participation of single women without children -- who became
eligible for a very small credit in 1994 if their earnings were very low -- did not change over this'
period (Chart 5). As Chart 6 indicates, the difference in the labor force participation rates of
single women with and without children has closely tracked the growth in maximum EITC
Chart 6: Maximum EITC and Difference in labor Force
Participation Between Single Women With and Without Children
Chart 5: labor Force Participation Rates of Single Women
With and Without Children
100.---------------------------,
3,500 r----"""------------------------,-8
~
~
(i)
BOO
.,
,§,3,OOO
Single women
without children
.!l!
:g 2,500
~
::::.2,000
e
c:
,Q
~ 80 -
~
:&.
~
.2
70 -
~
iii 1,500
E
::I
E 1,000 -
s::~'::~
'~
::E
~.
'"
...J
60W---~~-L'~~~~~--~~~~
1984
1986
1 988
1990
1992
1994
.1996
500 - ~-.~--_ .. / . - '
o
1984
1986
1988
1990
1992
1994
1996
~
Note: After 1990, lhe maximum EITC is Itle average of It1e maximum for
taxpayers with one child and with more than one child,
3The same numbers apply to two-parent families,
4
�benefits.4
One recent study concluded that as much as 60 percent of the increase in employment of
single mothers since 1984 was attributable to expansions in the EITC. 5 For the period between
1992 and 1996, the EITC explains 33 percent of the increase in annual employment. A second
study examined the 1986 EITC expansion, which was more modest than the 1993 expansion, and
found that it significantly increased labor force participation among single mothers, especially for
less educated women. 6 Yet another study-found that the EITC could result in an increase in labor
supply of 19.9 million hours in 1996 relative to 1993 law and induce 516,000 families to move
from welfare into the workforce. 7
EITC benefits for married couples are based on the combined earnings of both husband
and wife; Hence, married couples are more likely than single parent families to fall in the range
of earnings where the EITC is being phased out. This has caused some researchers to predict that
the EITC might cause a decrease in hours of work among married couples. However, the limited
available evidence suggests that the expansions in 1986, 1990, and 1993 had modest disincentive
effects of 1.2 percentage points on labor force participation of wives, and they actually had a
small positive effect on married men (of 0.2 percentage points).8
the extra income from the EITC being used?
Most families receive their EITC dollars at tax payment time, in the form of a larger
refund. A recent study interviewed low-income workers who had gone to a volunteer tax
preparation office in Chicago for assistance with their tax return. The study asked the workers
what they planned to do with the EITC they were expecting to receive and found that 61 percent
planned to use at least some of their refund for investment purposes, such as to pay for education
.(9 percent), repair, buy, or finance a car (10 percent), or to pay for a move (5 percent). Twenty
HOWlS
4Liebman, J.B. (1998). "The Impact of the Earned Income Tax Credit on Incentives and
Income Distribution." Tax Policy and the Economy, 12,83-119.
5Meyer, B., and"D.T. Rosenbaum (1998). "Welfare, the Earned Income Tax Credit, and
the Employment of Single Mothers." Department of Economics, Northwestern University.
6Eissa, N. and J.B. Liebman (1996). "Labor Supply Response to the Earned Income Tax
Credit." Quarterly Journal ofEconomics, 111(2): 605-637 ..
7Dickert, S., S. Houser, and J.K. Scholz (1995). "The Earned Income Tax Credit and
.Transfer Programs: A Study of Labor Market and Program Participation." Tax Policy and the
Economy, 9, 1-50.
..
8Eissa, N. and H.W. Hoynes (1998). "The Earned Income Tax Credit and the Labor
Supply of Married Couples." Department of Economics, University of California, Berkeley.
5
�eight percent said they were saving at least some of the EITC for future use. 9
3.2 Increasing the Minimum Wage
Chart 7: The Real Value of the Minimum Wage
The Administration has fought for
7.00
increases in the minimum wage, and on October!,
1996 the rate was raised from $4.25 to $4.75. The
rate was increased again to$5.150n September 1; . 6.50
1997. Prior to these increases, it had been five
'"
years since the minimum wage was last raised, and 12 6.00
(5
its real value had decreased by 15 percent (Chart
"05.50
!»
7).
Ol
5.00
As shown in Charts 1 and 2, the wages of
low-wage workers increased substantially since
4.50
1996,·and the recent minimum wage increases are
likely to explain much of this rise. . It has been
LL....~-'- ...~-'-~"---'-~--'---'~~-'----'-~...w
4.00
estimated that almost 10 million workers benefited
1979 1982 1985' 1988 1991
1994 1997
from the recent minimum wage hikes. 10
Most of the workers benefiting from the wage increases are adults from lower income
families, and their wages are a major source of their family's earnings. Among workers who
were earning between $4.25 and $5.15 just prior to the minimum wage increases, 71 percent
were adults (20 or older), 58 percent were women, and one-third were black or Hispanic workers.
Almost half of the affected workers (46 percent) worked full-time, and most of the low-wage
workers were in low-income households. That is, over half of the benefits from the minimum
. wage increases were received by households in the bottom 40 per~ent of the income distribution.
And in 1997, the earnings of the average minimum wage worker accounted for 54 percent of
their family's total earnings.
One of the potential side effects of increasing the minimum wage is a reduction in
employment. That is, with labor more expensive, some firms may hire fewer workers .. Many
. empirical studies have examined this issue, and the weight of the evidence suggests that modest
increases in the minimum wage have had very little or no effect on employment. In fact, a recent
study of the 1996-97 wage increases used several different methods and found that the
employment effects were statistically insignificant. Moreover, the unemployment rates of
African-American teens and high school dropouts, who are two groups of workers most likely to
0------
..- - - - - - - - - - - ,
~
9Smeeding,'T., K. Ross, M. O'Connor, and M. Simon (1998). "The EconomicImpact of
the Earned Income Tax Credit (EITC)." Center for Policy Research, Maxwell School of Public
Policy, Syracuse University.
lo-rhis finding, and the subsequent two paragraphs are based on: Bernstein, 1., and J.
Schmitt (1998). Making Work Pay: The Impact of the 1996-97 Minimum Wage Increase.
Economic Policy Institute, Washington, D.C.
6
�be affected by the wage hike, are lower today than they were just prior to the increases ..
~
4. The Combined Effects of EITC and Minimum Wage Expansions
Increases in the minimum wage and expansions in the EITC reinforce each other. Among
low-wage workers, these changes have produced substantial increases in income. Table 2
demonstrates the combined effect of the two policies (after inflation), comparing 1993 and 1997
(as if the minimum wage was in effect the full year). During this period the minimum wage rose
by 9 percent, while the maximum EITC credit rose by 38 percent for one-child families (116
percent for two-child families). For families with one earner working full-time at the minimum
wage, their combined earnings-plus-tax refund would have risen 14 percent if they had one child
(27 percent if they had two or more children). This is a significant gain in real purchasing power
among these parents.
.
As the bottom of Table 2 demonstrates, full-time work at the minimum wage no longer
leaves families below the poverty line. As a result of these policy changes, one and two-child
families with a single full-time minimum wage worker now earn enough to escape poverty.
5. Conclusion
The past several years have been very good ones for less-skilled workers in the labor
market. Wages are up and unemployment is down. Among single mothers, many more are
participating in the labor market, while welfare caseloads have declined steeply_ The research
evidence indicates that these gains partially reflect the strong economy, but that the gains have
been reinforced by Administration policies that have increased the financial rewards for low
wage and less skilled persons to work.
Providing ,the economic incentives to work are 'an important legacy of this
Administration. These gains mesh well with other goals this Administration has pursued, such as
adequate child care for the children of working mothers and available training for those workers
who want to increase their skills and work opportunities. In the long run, a healthy strong
economy must rely on a trained and hard-working labor force, with opportunities for both the
more and less educated. There has been real progress toward this goal in recent years.
'
7
�,.
Table 1. Factors Accounting for Changes in Child Poverty
1979-97
1979-89
1989-93
1993-97
Family structure
2.1%
1.2%
0..8%
0..3%
Earnings and other before-tax-and-after income
1.4%
1.1%
3.5%
-3.6%
Cash social insurance and welfare payments
0..3%
1.0.%
-1.1%
0..5%
Total change in official poverty measure
3.8%
3.2%
3.1%
-2.8%
Means-tested food and housing transfers
0..4%
0..4%
-0..3%
0..4%
Taxes
-2.3%
0..3%
0..0.%
-2.6%
1.9%
4.0.%
2.9%
-5.0.%
Changes to official poverty rate attributable to
changes in:
Change in extended poverty rate attributable to
changes in:
Total change in extended poverty rate
8
�,.
Table 2. The Effects of Changing Minimum Wage and EITC on Earnings of Single Parents
(All numbers in $1997)
Percent Change
1993
1997
$4.72
$5.15
.9
One-child family
$1,602
$2,210
38
Two-child family
$1,689
$3,656
116
One-child family
$10,320
$11,722
14
Two-child family
$10,407
$13,168
27
0.93
1.06
Program Parameters
Minimum wage
Maximum EITC
Earnings minus
taxes *
Ratio of earnings
minus taxes to
poverty line
One-child family
Two-child family
0.80
1.02
*Assumes one earner works full-time/full-year (2000 hours) at minimum wage. Taxes include
income taxes (including the EITC) and employee share of social security taxes.
'
9
�Earned Income Tax Credit:
Rewarding Working Families
Department of the Treasury·
October~ 1998
�Overview
•
General Description and Goals of the EITC: Page 3
•
Current Law:, Page 9
•
EITC Increases Work and Reduces Poverty: Page 15
•
17 Administration Measures to Improve 'EITC Compliance and Targeting: 1993-1996:
Page 19
•
IRS,Study of EITC Compliance: Page 27
•
Misperceptions About EITC Error Rates:' Page 32
•
New Initiatives to Reduce EITC Error
•
State-by-State Data: Page 47
Rat~s:'
1997 and Beyond: Page "36
��Earned Income Tax Credit: General Description·
•
. The earned income tax credit (EITC) is a refundable tax credit for working families with low
.
Incomes.
•
For every dollar a low-income worker earns up to a limit, between 8 and 40 cents are
provided asa tax credit. Above a given level, the size of the tax creditis g~adually reduced.
•
•
- Because the credit is refundable, individuals can receive the full amount to which they are
entitled even if the amount exceeds the individual income taxes they owe.
On 1998 tax returns, the EITC will provide a tax credit averaging nearly $1,550 for nearly
20 million workers and their families. Working families with earnings of up to $30,095 per
year may be eligible for the EITC.
-4
�Two Goals of the EITC
•
Encourage Families To Move From Welfare to Work by making work pay.
•
Reward Work for Working Families so parents who work full-time do not have to raise
their children in poverty -- and families with" modest means do not suffer from eroding
.
Incomes.
By providing an offset against other Federal taxes, the EITe increases disposable'
income for workers and their families.
-5
�Moving Families From Welfare To Work
•
Social Security taxes and various means-tested· benefits create economic disincentives for
welfare recipients to work. For each additional dollar a worker earns, benefits decline and
pa yroll taxes increase.
The EITC offsets these disincentives with a stron~ incentive to work. About 80 percent
. of EITC payments offsets the individual income, social security, and other Federal taxes
borne by families receiving the credit.
.
•
.
The EITC encourages families, to work two ways.
The EITC is only available to working families. If you don't work, you don't get
the credit.
At the lowest income levels, the EITC grows with each dollar of earnings. ·For
people with very little income, more work rneans more benefits from the EITC.
-6
�Rewarding America
•
Working Families
People who work hard and play by the rules should be rewarded for their efforts.
Parents who work full-time for an entire year should not have to raise their children in
poverty_
Parents with moderate incomes should not see their standards of living decline.
•
The condition of low- and moderate-income families has deteriorated since 1979_
Payroll taxes increased five times between 1983 and
1990~
In the early 1970s, most states provided AFDC benefits as a wage supplement to a
mother with two children whose earnings equaled 75 percent of the poverty level. By
the mid-nineties, only three states provided comparable benefits.
The poverty rate for families with children grew by nearly half from 1979 to 1993_
Even after recent declines in the poverty rate, 15.7 percent of families with children still
lived in poverty in 1997_
Between 1979 and 1992, the earnings of a male without a high school degree declined
by more than 23 percent in real terms. Among male workers with a high school
degree, real -earnings declined by 17 percent over this period.
•
The EITC rewards work. But there is still more to do to ensure that full-time workers do not
raise their children in poverty_,
-7
�, Providing the EITC T
Jugh the Tax System
•
Th~
•
EITC' claimants are taxpayers. If the EITC did not exist, almost 95 percent of EITC filers
EITC is a non-bureaucratic way to reward work effort. There are no middlemen or
service providers. There are no long lines at government offices. There is no need to take
valuable time off from work in order to apply for the credit. The tax refund is provided by
the IRS directly to the working families.
would still file an individual income tax return (in addition to paying payroll and excise
taxes), and the IRS would still have to process their returns and verify much of the same
i,nformation regarding their filing status, number of children, and income.
•
Participation in the EITC tends to be higher than many other assistance programs, targeted to
low-income families. In'1990, 80 to 86 percent of those eligible received the credit. This
high participation rate is striking when compared to the food stamp participatiori rate of 59
percent in 1989. 1
•
Because most EITC claimants would be filing a tax return even ifthe credit did not exist, the
direct budgetary costs of administering the EITC are significantly lower than if the credit
were provided through another means. In FY 1995, the food stamp program cost $3.7 billion'
to administer, while AFDC administrative costs were an additional $3.5 billion -- nearly 14
percent of the combined costs of these two programs. By way of comparison; the entire IRS
budget in FY 1995 was $7.6 billion, roughly the combined total administrative budgets of the
AFDC and food stamp programs.
Food stamp participation was not studied in 1990. Since 1989, food stamp participation rates have climbed (to 71 percent
of eligible individuals in 1994). Comparable data are not available for the EITC.
-8~
��The EITC After 0BRA 1993
•
In February 1993, the Clinton Administration made several proposals to expand and simplify
the EITC. With certain modifications, Congress enacted these proposals as part of the
Omnibus Budget Reconciliation Act of 1993 (OBRA 1993).
•
For every dollar a very low-income working parent with one child earns, the EITC was
·increased from 23 cents to 34 cents.
•
For every dollar a very low-income working parent with two or more children earns, the
EITC was increased from 25 cents to 40 cents.
The maximum credit was increased by over $1,500.
Eligibility for the credit ·was extended to families with two or more children that have
incomes of up to $30,095 (or about $3,600 above the prior law level).2
•
A small EITC, designed to help offset the employee portion of payroll taxes; was extended
for the first time to very low-wage workers without qualifying children ..
•
OBRA 1993 eliminated two complex supplemental credits for health insurance coverage and
for taxpayers with children under the age of one.
Some critics of the program have argued that the EITC should not be available to families with incomes of $30,000. But
if the income thresholds had not been ch~nged in 1993, the increase in the maximum credit would have resulted in a phase-out rate of
30 percent. By modifying the income thresholds slightly, the EITC phase-out rate for a family with two or more children was increased
from 17.86 percent to 21.06 percent. Moreover, the income cut-off is far less than the median income for a family of four. In 1998,
the median income fora family of fo.ur is estimated to be over $54,000.
.
2
-10
�OBRA 1993
e
A~hieved
Goals of Program
OBRA 1993 supported welfare over work by bolstering the incomes of families moving from
welfare to work.
From every added dollar a low-income family earns, payroll taxes (including the
employer's share of payroll taxes) take 15.3 cents while Food Stamp benefits decline by
24 cents. For a low-wage family with two children, the EITe fully offsets these effects
by providing a 40 cent credit for every dollar earned.
:eOBRA 1993 rewarded work for working families by moving toward the goal that a full-time
worker should not live in poverty if he or· she works throughout the year.
-11
�Extending the EITC to Low-Income Workers
Who Do Not Reside with Qualifying Children
•
OBRA 1993 extended a small earned income tax credit (EITC) to very low-wage workers
who do not reside with children.
To be eligible for this credit, a worker must have adjusted gross income of less than
$10,030 in 1998.
, The credit is equal to 7.65 percent of earned income up to a maximum credit of $341 in
1998. It was designed to help offset the work disincentive effects of the social security
tax rate (7.65 percent for employees and employers, each).
This provision reduces taxes, on average, by $195 for 3.2 million
wor~ers
in 1998.
•
To be eligible for the EITC without children in residence, workers must be over age 24 and
below age 65.
•
In 1994, nearly half of the claimants for this credit had adjusted gross income of less than
$5,000.-On average, their wage income was $4,800. Despite their low income, only about 8
percent reported receipt of unemployment benefits - possibly because many may have
worked in jobs that were not covered under FUTA.
-12
�The Earned Income Tax Credit, 1998
4,500
4,000
0
.$3,756
............•.
..
....
..
..
...
•
•
3,500
3,000
..
••
-
w
•
en
.i
•
1: 2,500
6
E
«
'6 2 ,000
.•.
•
••
••
..
.
~
o
1,500
$2,271
0
1,000
!
.
soo
~.
o
o
....•
..•
..
..
.
...
..
...
.. .
....
....
...
••
••..
...
Two or More Children
•
......
•.. ..
One Child
•..
••
••
•.. ..
.. ..
No Children
.. •
..
.. •..
. ...
...
.....
..
$~1
.................. e.
•_
.. _
5,000
e.
-.-.
.~
10,000
15,000
20,000
. 25,000
Earned Income or Adjusted Gross Income
....
.
~....
. ...
. ...
30,000
35,000
�Earned Income Tax'_.edit Parameters
1998
Credit
Rate
Plateau
Beginning
End
Point
Point
Maximum
Credit
Phase-out
Rate
$2.271
$3,756
$34,1
15.98%
21.06%
7.65%
Income
Current Law
Families with one child
Families with two or more children
Workers without children
Department of the Treasury
Office of Tax Analysis
Disqualified Income Amount: $2,300
34.0%
40.0%
7.65%
$6,680
$9,390
$4,460
$12,260
$12,260
$5,570
October 1, 1998
$26,473
$30,095
$10,030
�-
I
U\
I
�Helping to Move Families from Welfare-to-Work
• . The EITC helps workers stay in the labor force and off of welfare by increasing their take
home pay. About 19.7 million workers are expected to claim the EITC for tax year 1998.
They will receive an average credit of$1 ,547. About 16.5 million of these claims will be for
workers living with children, who will receive an average credit of $1,807.
•. Eissa and Liebman (1996). estimate that the EITC expansion and other provisions in the Tax
Reform Act of 1986 increased labor force participation among single women with ch,i1dren by
2.8 percentage points -- from 73.0 percent to 75.8 percent. Among women with less than a
high school education, they estimate that the 1986 Act increased labor force participation rate
by 6.1 percentage points.
•
Dickert, Hauser, and Scholz (1995) found that the EITC could result in an increase in labor
supply of 19.9 million hours in 1996 relative to 1993 law and induce 516,000 families to
move from welfare to the workforce.
•
Meyer and Rosenbaum (1997) find that annual labor force participation of single mothers has
increased by nearly nine percentage points between 1984 and 1996, and that much of this
increase may be explained by the significant expansions of the EITC and other changes in tax
policy over this period.
•
The number of individuals receiving welfare fell by 20 percent from January 1993 to January
1997 -- the largest decline in over 50 years. According to the Council of Economic Advisers,
this dramatic decline is due to the economic expansion, statewide w~lfare reform waivers,
and other policies, including the 1990 and 1993 expansions of the EITC.
-16
�EITC· Reduces Poverty
•
•
The Census Bureau
r~ports
that the EITC lifted 4.3 million persons out of poverty in 1997.
.The EITC moves children and single mothers out of poverty.
Among the 4.3 million persons lifted out of poverty by the EITC, over half -- 2.2
million -- were children under the age of 18.
Nearly 1.8 million persons, living in families headed by an unmarried female, were
removed from poverty as a consequence of the EITC.
•. . Minority working families benefit from the EITC.
The EITC removed about 1. 1 million African-Americans and nearly 1.2 million persons
of Hisp~nic origin from poverty in 1997.
-17
�Growth of EITCContribu\._ . . :to Drop in Child Poverty
•
After falling sharply in the 1960s, poverty among children increased between 1969 and 1993.
•
Since 1993, the child' poverty rate has fallen. Using a measure of poverty that takes into
account both taxes and transfers, the child poverty rate declined by 4.7 percentage points
between 1993 and 1996.
An analysis by the Council of Economic Advisers ,shows that about half of this decline
is attributable to changes in tax policy, and in particular, the recent expansion of the
, EITC.
-18
�17 ADMINISTRATION MEASURES- .
o IMPROVE EITC COMPLIANCE AND TARGETING:
1993- 1996
�Simplicity and Verifiability
•
The Clinton Administration is committed to ensuring that deserving and eligible
individuals -- and only those individuals -- are able to claim and receive the EITe.
•
Two key means to this end are the simplicity and verifiability of EITe claims..
If eligibility rules are simple, taxpayers can more accurately claim the EITe and
avoid costly errors.
If eligibility rules are verifiable, the IRS can better ensure that ·the EITe is paid
only to those who are eligible.
•
Between 1993 and 1996, the Administration took 11 measures 'to ensure the simplicity
and verifiability of the EITC and to reduce erroneous or undeserved claims.
-20
�OBRA 1993
1.
The EITC was simplified by repealing the complex supplemental credit for health insurance
coverage.
Some taxpayers made mistakes in their claims because they.did not understand the
complicated eligibility criteria.
2.
The EITC was further simplified by repealing the supplemental credit for children under the·
age of one.
This should also improve EITC compliance, as taxpayers could not understand the
eligibility criteria for the young child credit, and the rules were difficult to administer.
-21
�Uruguay Round
Ab-~ement
Act of 1994
3. . The EITC was denied to nonresident aliens.
Under prior law, nonresident aliens could receive the EITC based on their earnings in.
the United States, even though they are not required to report their worldwide income to
the IRS.
4.
Prisoners will not be ,eligIble for the EITC based on their earnings while incarcerated ..
.This provision was applied immediately to 1994 tax
retu~ns.
5.' Taxpayers will be required to provide a taxpayer identification number ,for each EITC
qualifying child, regardless of age.
This will allow the IRS to verify eligibility for each child claimed by the taxpayer.
This provision was phased-in over a three year period. It was fully implemented
beginning with 1997 tax returns.
6.
The Department of Defense i~ required to report to both the IRS and military personnel non
taxable earned income paid during the year that is included in computing the EITC.
This will ensure that 'military personnel receive the benefit for which they are eligible.
-22
�:sonal Responsibility and Work l
. 7.
;ortunity Reconciliation Act of 19..
The IRS is authorized to use the simpler and more efficient "mathematical error" procedures
when taxpayers fail to supply valid social security numbers when claiming the EITC or
dependent exemptions. This provision took effect at the beginning of the 1997 filing season.
During the 1997filing season, the IRS protected $1.46 billion by applying mathematical
error procedures to returns that did not include valid SSNs for EITC qualifying children
or dependent exemptions.
8.
9.
. Undocumented workers are no longer eligible for the EITC._
Using mathematical error procedures, the IRS may assess EITC claimants for any outstanding
self-employment tax liability.
This provision reduces incentives to overreport income to obtain a larger EITC.
10. The recent bill extending the health insurance deduction for self-employed individuals
. included a variation of a Clinton Administration proposal to deny the EITC to taxpayers with
large amounts of inv~stment income. As modified by the welfare reform act, the EITC is
denied to taxpayers with investment income in excess of $2,250 (1997 threshold, adjusted for
inflation) .
Many of these taxpayers have'significant assets and do not need the EITC.
11. New restrictions are placed on the amount of losses taxpayers can use to reduce their EITC
income.
-23
�Verifying and DeJayh. ~
~uestionable
Refunds
12. The IRS has instituted 'a series of tough new administrative measures, to reduce EITC errors.
The IRS now scrutinizes the social security numbers of all EITC qualifying children.
Since 1995, taxpayers are no longer allowed to file an electronic return with missing,'
invalid, or duplicate social security numbers for EITC qualifyin8 children and
dependent exemptions. During the 1995, filing season, the IRS identified 4.1 million
social security number problems on electronic submissions, of which 1.3 million
involved the EITC. Taxpayers were asked to correct the social security number before
-.resubmitting the return. In'1996, there was a 25 percent reduction in the number of
electronic returns rejected because of missing, invalid or duplicate uses of social
security numbers.
~uringthe
1995 and 1996 filing seasons, the IRS also intensified verification of social
security numbers on paper returns claiming either an EITC qualifying child or a
dependent exemption. In FY 1996, these efforts resulted in r~commended changes of
about $900 million.
As noted above, the Personal Responsibility and Work Opportunity Act of 1996 gave
the IRS the authority to use simpler and more efficient procedures when taxpayers fail
to supply valid social security numbers. These procedures are noW in place.
13. EITC refunds may also be delay'ed if the IRS has questions regarding the validity of the
claim. During the 1995 filing season, the IRS slowed EITC refunds for over four million
taxpayers who matched profiles of noncompliant taxpayers.
-24
�. Intensifying Scrutiny of E~.:ronic Return Originators.
14. Beginning with the 1995 filing season, the IRS is no longer providing direct deposit indicators
(DDIs) to preparers of electronic returns (EROs). The DDIs gave preparers a quick signal
from the IRS that a taxpayer was going to receive a refund check. Preparers used this
information to advance taxpayers loans on their refund checks within a couple days of filing a
return. The taxpayer would receive a loan, and the IRS would pay the· refund directly to the
ERa. If the return was later determined to be fraudulent, the IRS -- not the preparer -- was
left with the bill if the taxpayer disappeared with the refund anticipation loan.
Eliminating the DDI provides EROs with greater incentives to check the eligibility of
EITC claimants. Preparers will not find it in their interest to advance refund
anticipation loans to filers who may not be receiving a refund from the IRS.
15. In its enforcement activities, theIRS has also found that some EROs have 'been .responsible
for refund fraud. The IRS has taken several steps to stop this practice:
Fingerprint and credit checks are conducted on certain new ERa applicants .
. IRS is conducting additional compliance checks to ensure that EROs are meeting
new, stricter requirements for participation in the program. During the 1995
filing season,the IRS conduced 6,500 compliance checks.
The IRS is working with the Justice Department to prosecute preparers and EROs
who take advantage of the EITC to defraud the Federal government.
-25
�Othel
.~tions
16. The 1994 Schedule EIC was shortened and simplified to make it easier for low-income
taxpayers to understand if they are eligible for the credit.
17. The IRS has conducted studies of EITC compliance (in tax years 1993 and 1994) to better
understand the magnitude and source of erroneous payments.
-26
��Enforcement Efforts 11.
.:"ove EITC Compliance
•
During the 1995 filing season, the IRS Criminal Investigations Division (CID) conducted a
study of compliance among taxpayers who claimed the EITC on their 1994 tax returns.
• .
Of the $17.2 billion claimed in EITC between January and April 1995, $4.4 billion, or 25.8
percent of total EITC claimed, exceeded the amount to which taxpayers were eligible.
•
IRS enforcement practices, which were in place during the 1995 filing season, reduced the
estimated net overclaim rate from 25.8 percent to 23.5 percent.
•
If the IRS had been able to treat a taxpayer's failure to provide valid social security numbers
for EITC qualifying children over the age of one as a mathematical error on 1994 tax returns
(as it is currently able to do), the net overclaim rate would have been reduced further, to an
.estimated 20.7 percent.
- -28
�The IRS Can Detect
..
•
.
any Common Errors
,
"
The most common EITC error wa& associated with taxpayers who claimed children who did
not live with them for over half the year (or a full year if the children were not the taxpayers'
sons,. daughters, or grandchildren) .
. Many of these -errors are unintentional-- resulting from the ordinary mistakes that
taxpayers make on all kinds of tax returns. IRS enforcement tools are also improving at
.identifying both intentional and unintentional errors.
•
A divorced couple share custody of their son. The boy lives with his mother, but often stays
at his father's apartment overnight. Both parents claim the EITC on behalf of their son, but
only one of them· can be eligible -- the parent with whom the child lived for over half the
year.
_
Through matching of social security numbers, the IRS identifies duplicate claims of the
same child and can correspond with both taxpayers to determine whose claim is correct.
• . On the Schedule EIC, a single man claims that a neighbor'S child is his own.
_does not live with the child.
But~
the man
The man does not know the SSN of his neighbor's child. Without a valid SSN for the
child, the IRS rejects the man's claim using the new mathematical error procedures
enacted in the welfare reform act.
The combination of SSN validation and mathematical error procedures (which were not
in effect during the 1995 filing season) would have eliminated 30 percent of residency
based errors (nearly half of which were made by unmarried men).
-29
�EITC Compliance Imp.. _. "ed Sharply Since 1980s
,•
EITC compliance has improved significantly since the eighties.
•
The most recent Taxpayer Compliance Measurement Program (TCMP) was conducted in
1988 and found that 35.4 percent ofthe EITC amount claimed exceeded the amount for
which taxpayers were eligible -- 10 to15 percentage points higher than the error rates found
in the 1994 study.
•
Compliance has improved, -even as the size of the credit has increased. The average EITC
has increased from $529 ($663 in 1994 dollars) to $1,100 over the same period.
•
Both legislative and administrative initiatives, taken since 19&8, have contributed to the
improvement in compliance.
-30
�, 1994. Error Rates Do Not Rei
•
.t Current EITC Compliance
The new study does not fully reflect the effects of the IRS enforcement initiatives during the
1995 filing season.
It is likely that the intensified enforcement activities during the 1995 filing season
discouraged some taxpayers from claiming the credit at all. The number of EITC
, claimants with qualifying children dropped by nearly 200,000 between tax years 1993
and 1994, although this population had grown by about one million the previous year
and had increased every year since 1986. ,
•
Since the 1995 filing season, other steps have been taken which -- all other things equal ;..
, may have improved EITCcompliance. These include:
Beginning with 1997 tax returns, taxpayers will be required to provide a social security
number for all EITC qualifying children. In 1994, they were only required to provide
an SSN for children over the age of one.
Beginning with ,1996 tax returns, the EITC is denied to undocumented workers.
The study could not take into account the full impact of the new mathematic'al error
authority. The 1996 welfare reform act authorized the IRS to deny the EITC to
taxpayers who use an invalid social security number for themselves (or their spouses).
-31
��Compliance
~
.lies Outdated
•
Some in Congress are using the results from the 1994. study to project that between $20 and
$30 billion of the BITC will be "wasted" over the -next five years -- going to individuals who
are not eligible for the credit.
•
These statements are incorrect. The results of the 1994 study do not represent the EITe
today.
•
The 1994 study is based on dated information (1994 returns filed between January 1995 and
April 1995) and does not take into account all of the 17 aggressive Administration steps to cut
. the error rate (outlined above) that were enacted between 1993 and 1996~
. • The 1994 study is also outdated because it was conducted before Congress enacted the
Taxpayer Relief Act of' 1997. TRA includes 6 new provisions aimed at reducing EITC
noncompliance.
•
Since the 1994 study was conducted, Congress has increased IRS appropriations to combat
.BITC errors.
-33
�EITC Noncompliance Is
~
. _~ Linked to Refundability
•
Some also claim that the refundable nature of the credit increases noncompliance. The 1994
study does not support this theory.
•
The overclaim rate among those with a positive pre-EITC tax liability is nearly three times
larger than the rate among those who did not have a tax liability. The study thus suggests
that noncompliant EITC claimants do not enter the tax system merely to claim the credit.
•
If. the EITC did not exist, almost 95 percent of EITC filers would still file an individual
income tax return (in addition to paying payroll and excise taxes), and the IRS would still
have to process their returns and verify much of the same information regarding their filing
status, number of chil~ren, and income.
-34
�.Tax Nonconlpliallce Hit- lr for Other Provisions
•
Some say that no other part of the tax code has as many errors as the EITe.
Last April, the IRS released a study showing that the gross individual income tax gap in
1992 ~as betw.een $93.2 and $95.3 billion. The overall individual noncompliance rate
. was estimated to range from 16.9 to 17.3 percent.
•
_ The" estimates for 1992' show that other areas of the tax code are a much greater source of the
tax gap than the EITe.
-
. Over 40 percent ($39. 1 to $39.9 billion) of the gross tax gap for 1992 was attributed to
the underreporting of business income (including $16.4 to $16.9 billion from the
underreporting of non-farm sole proprietorship income and $12.3 "billion from the
underreporting of informal supplier income).
That is more than was spent on the entire EITe in 1997.
-35
�NEW INITIATIVES TO REDUCE EITC ERROR RATES:
. 1997 AND BEYOND'
�New Aggressive Actions to Prevent EITC Noncompliance .
•
The Clinton Administration recognizes that EITC error rates are a problem and has acted
aggressively to reduce them.
•
The earlier enforcement efforts were effective in bringing the EITC error rate down to 20
percent from 35 percent. Now, we can build on those earlier efforts to improve EITC
compliance even more.
•
The Taxpayer Relief Act of 1997 contains six new Administration proposals to combat EITC
. noncompliance.
.•. The Balanced Budget Act of 1997 also lifted the discretionary appropriations cap for the next
five years by $716 million in order to give the IRS the resources it needs to reduceEITC
errors.
The first installment of $138 million was included in the FY 1998 appropriations bill.
•
Over the next ten years, the EITC compliance initiatives in TRA will save over $5 billion.
-37- .
�. Taxpayer Rl
: Act of 1997 .
•
The Taxpayer Relief Act of 1997 includes 6 additional compliance provisions that were
developed by the Administration:
1.
The IRS will have access to an expanded Federal Case Registry of Child Support Orders,
which will allow the IRS to better identify' erroneous EITC claims by non-custodial parents.
2. Beginning in 1998, SSA is now required to obtain the social security numbers of parents of
minor children when they apply fer their own social s~curity numbers. The IRS will use this
information to .identify erroneous EITC claims by taxpayers.
3.
In addition to enforcing the current civil and criminal penalties, the IRS may automatically
deny' for ten years the EITC claims of those who are found to have claimed the credit
fraudulently. If an EITCerror is due to reckless or intentional disregard, the taxpayer is
ineligible for the credit for the next two years.
4.
If the IRS denies an EITC claim after examination, the taxpayer would not be automatically
eligible for the EITC in the future. Taxpayers must be recertified as eligible by the IRS in
order to claim the credit again.
.
.
5. The IRS is now able to place liens and execute levies on a portion of unemployment
compensation and public assistance in order to collect outstanding tax liabilities and penalties.
6.
Under this legislation, preparers who do not fulfill certain due diligence requirements are
subject to $100 penalty per return.
.
-38~
�EITC Compliance Initiath . ~11 FY 1998 Appropriations
.,
•
In its FY 1998 appropriations, IRS received $138 million to address EITC noncompliance.
This funding is being used to increase both enforcement and taxpayer education.
.
'
.
.
.
Returns with missing or invaljd social security numbers will be identified and adjusted
using math error processing. IRS estimates that 600,000 returns were identifi~d during
. the 1998 filing season for EITC-related math error conditions. During the 1997 filing
season, the IRS protected $1.46 billion by applying math error procedures to returns
using invalid SSNs for dependent exemptions and EITC qualifying children. In the
1998 filing season, the IRS extended the use of math error procedures to cases wher~
invalid SSNs are used by primary taxpayers.
During the 1998 filing season,IRS service centers examined over 700,000 EITC
claims, including cases where more than one taxpayer claims the same qualifying child.
Earlier this year, IRS' put taxpayers on warning by sending out 2.3 million notices to
taxpayers with duplicate claims last year of dependents and EITC qualifying children.
Staffing for the Questionable Refund Detection Teams (QRDT) in the service centers
has been increased to screen additional returns and identify questionable EITC claims,
EITC-based refund schemes, and questionableEITC preparers. Over 400 FTEs were
devoted to the QRDT to screen over 3 million returns.
40 new special agents were to be hired and trained to investigate EITC return preparers
identified by QRDT.
-39
�FY 1998 IRS Appr'iations, Continued
District Office.Examination isdedicating 132 FTEs to EITC returns referred by service
centers. These examinations will focus on noncompliant EITC return preparers and
fraudulent taxpayers.
IRS is expanding its telephone information number (l-BOO-TAX-I040) to handle EITC
questions. For the first time, taxpayers will be able to call this number 24 hours a day,
seven days a week in order to get their EITC questions answered.
A new national informant's hotline has been established to handle, among other things,
reports of fraudulent taxpayer and unscrupulous preparer activity.
Saturday walk-in access has been expanded for help on completing forms or responding
to EITC-related notices.
On March 2B, 199B, the IRS will hold EITC Awareness pay.
-40
�Child Custody Data Will H
_ Identify Erroneous Claims
•
According to the 1994 EITC compliance study, the most common error made by EITC filers
was claiming children who did not reside with them.
•
In the past, the IRS could not verify residency of children without corresponding with the
taxpayer.
•
•
. Under TRA, the Federal Child Support Case Registry is being expanded to link data on
children with both. their custodial and noncustodial parents.
TRA also gave IRS access to the Federal Child Support Case Registry. The IRS will be able
to use this information to better identify questionable claims before EITC refunds are paid
out.
-41
�.~ew Relationship'Data Will Help .' ~S Better Target Audit Resources
"
•
Another common error occurs when taxpayers claim children who are not related to them.
The 1994 EITC compliance study found over $500 million of EITC overclaims resulted from
taxpayers who claim children who did not meet the relationship test.
•
In the past, the IRS could not identify these cases without corresponding with the taxpayers
because the agency did not have access to independent information regarding the relationship
of the filer to the child.
•
TRA 1997 requires parents to report their social security numbers when obtaining a social
security number for their child. TRA also gives the IRS access to SSA data that will link the
social security numbers of parents to the social security numbers of their children.
•
The IRS can use this information to better identify questionable claims before refunds are
paid out.
-42
,
�Good Preparers
•
C~
. J.\1ake a Difference
Like many other taxpayers~ a large number of EITC claimants -- about half -- turn to tax
preparers to. help them complete their tax returns.
About half of those who use preparers used an attorney, certified public accountant,
enrolled agent, the IRS, or a nationally recognized return preparation frrm. The other
half appeared to use a neighborhood service or preparer. .
•
•
On average, overclaim rates do not differ much among taxpayers who use preparers and
those who do not.
. But overclaim rates are significantly different among returns, depending on the type of
preparer used by the taxpayer.
The overclaim rate for returns' completed by a local or unknown preparer was over 50
percent higher than the overclaim rate for returns prepared by a~ attorney, CPA,
enrolled agent, or nationally known service.
The IRS examiners sometimes found that preparers had not asked the taxpayers the right
questions before determining their eligibility for the EITC.
•
Good preparers ask clients basic questions before determining whether they are eligible for
the EITC. TRA imposes due diligence requirements on all preparers.
-43
�Good Preparers Can Help Taxpafers Avoid Unintentional Errors
•
Separation and divorce complicate both personal and financial lives. By asking the right
questions, a good preparer can .make sure that a taxpayer avoids tax problems when
marriages are falling apart.
•
For example, ataxpayer and children are deserted by her husband. Unable to pay for a
lawyer, she does not file for a legal separation. A good preparer can help her determine if
she is still eligible for the EITC, even though she is not legally separated or divorced.
The so-called abandoned spouse rules are not widely known and may be difficult to
understand. Under these rules, the wife, while married, could claim head of household
filing status and be eligible for the EITC if she paid over half the costs of maintaining
the home in which she and her children lived during the year, and she and her children
lived apart from her husband for the last six months of the year.
Not surprisingly, some taxpayers don't understand how these rules affect them. For
example, if the wife moves in with her parents, she will not be considered an
"abandoned spouse" for tax purposes if her parents pay for half the costs of maintaining
their home. Unable (or unwilling) to locate her husband, she cannot easily file a joint
return with him. She must file, instead, a "married filing separately" return, which
automatically makes her ineligible for the EITC.
•
Life is· complicated, and the tax code sometimes must reflect this complexity . But a good paid
. preparer or a VITA volunteer can help taxpayers avoid unintentional errors on their returns.
The.EITC compliance initiative improves access to free taxpayer assistance, while TRA
ensures that paid preparers will be better able to help taxpayers understand the tax code.
-44
�Penalties, Levies,
.d Recertification
•
Taxpayers may be deterred from making intentional or fraudulent errors on their tax returns
by the fear that the IRS will impose significant cash penalties.
•
Cash penalties may not be an effective deterrent among low-income individuals who
intentionally cheat -- because they know that they will not have the cash to pay the penalties.
•
Denying eligibility of the ·EITC in future years or applying levies to other government
benefitS are alternative ways to impose monetary penalties on taxpayers who may not have
much cash on hand.
•
Pre-TRA law also imposed significant costs on the IRS. Even if the IRS found that a
taxpayer repeatedly engaged in fraud in earlier years, the IRS had to institute a deficiency
procedure to investigate a questionable return in a future year.
The newly enacted penalties will reduce IRS enforcement costs, by allowing the IRS to
focus examination resources in subsequent years on noncompliant taxpayers other than
'
repeat offenders.
•
Taxpayers' rights. must be protected and will remained safeguarded under these new
provisions. The penalty and recertification provisions would be subject to review by the tax
courts. Further, taxpayers would be able to apply for a hardship exemption from the levy
.
provIsion.
-45
�Future Action
..
II
01•..
ITC Compliance
.
The Administration is committed to improving EITC compliance. As new problems arise or
are identified, the Administration will respond with new administrative and legislative
initiatives.
However, the Administration will oppose proposals that reduce the EITC and raise taxes
on. workers and their families, who are playing by the rules.
•
The FY 1999 budget contains two new proposals in response to issues that have arisen since
last summer.
Math error authority would be expanded to allow the IRS to deny EITC claims to
taxpayers who do not meet age tests for the credit. (Under current law, able-bodied
qualifying children must be under age 19 or 24, if a full-time student. In addition,
EITC claimants who do not live with qualifying children must be between the ages of 25
and 64.)
The adjusted gross income tie-breaker test would be clarified to conform to IRS past
practices. A recent court decision found that the AGI tie-breaker only applied in cases
where more than one taxpayer claimed the same child for EITC purposes. Under the
Administration's proposal, if two taxpayers-live together and could qualify to claim the
-same child for EITCpurposes, only the taxpayer with the lower AGI would be eligible.
This proposal is consistent with past IRS practices and Congressional intent and was
enacted in the IRS Restructuring legislation.
•
In addition, the FY 1999 budget contains a third proposal to clarify the definition of anEITC
foster child.
-46
��Eamed Income Tax Credit Claims by State
for the 1996 Tax Year
Total
Number of
Taxpayers
State
Alabama
Alaska
Arizona
Arkansas
Califomia
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana'
Iowa
Kansas
Kentucky
'uisiana
.aine
Maryland
Massachussetts
Michigan
Minnesota
Mississippi
Missourri
IMontana
i'Nebraska
!Nevada
New Hampshire
New Jersey
New Mexico
'"
1,843,993
349,245
1,909,634
1,066,104
13,488,180
1,839,481
1,581,255
349,682
6,748,748
3,305,276
549,619
507,786
5,488,875
2,690,910
1,300,036
1,151,260
• 1,636,942
1,795,375
566,623
2,417,853
2,898,823
4,368,021
2,187,821
1,121,796
2,416,434
400,488
775,462
800,491
572,520
. 3,817,966
747,677
A verage Claim
Total Claim
Percentage of
Total
Amount
Amount
Taxpayers
Number of
($)
EITC Claims Claiming EITC (thousands of $)
455,700
29,163
340,744
254,655
2,328,577
238,004
140,434
49,660
1,266,063
688,637
61,172
81,449
750,567
373,038
155,775
. 150,022
304,952
486,498
82,654
342,050
277,594
564,631
219,805
354,459
391,513
67,001
98,577
117,550
58,305
445,771
175,797
24.7
8.4
17.8
23.9
17.3
12.9
8.9
14.2
18.8
20.8
11.1
16.0
13.7
13.9
12.0
13.0
18.6
27.1
14.6
14.1
9.6
12.9
10.0
31.6
16.2
16.7
12.7
14.7
10.2
·11.7
23.5
746,148
35,172
512,802
404,698
3,413,006
321,286
174,875
72,037
1,857,110
1,076,620
72,081
116,619
1,065,814
528,233
209,342 .
208,105
431,216
,813,128
108,379
480,900
341,731
778,139
282,797
608,481
567,873
91,715
136,999 .
161,108
75,101
616,860
257,224
1,637
1,206
1,505
1,589
1,466
1,350
1,245
1,451
1,467
1,563
1,178
1,432
1,420
1,416
1,344
1,387
1,414
1,671
1,311
.1,406
1,231
1,378
1,287
1,717
1,450
1,369
1,390
1,371
1,288
1,384
1,463
�Earned Income Tax Credit Claims by State
for the 1996 Tax Year
Total
Number of
Taxpayers
State
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
~ 'est Virginia
sconsin
If'/yoming
District of Columbia
.
Other
Total U. S.
Department of the Treasury
Office of Tax Analysis
Average Claim
Total Claim
Percentage of
Total
Amount
Amount
Taxpayers .
Number of
($)
Claiming EITC I (thousands of $)
EITC Claims
8,030,653
3,394,691
293,332
5,357,715
1,392,280
1,471,788
5,514,958 .
455,645
1,681,507
332,842
2,416,153
8,243,456
847,478
277,637
3,056,620
2,544,398
722,094
2,427,460
222,938
270,163
1,246,779
662,627
38,489
690,866
285,195
201,743
688,393
58,322
378,979
49,495
484,909
1,873,158
109,620
36,913
434,177
301,827
137,000
259,276
33,549
53,842
1,138,640
28,605
120,786,824
19,404,581
·15.5
19.5
13.1
12.9
20.5
13.7
12.5
12.8
22.5
14.9
20.1
22.7
12.9
13.3
14.2
11.9
19.0
10.7
15.0
19.9
1,717,697
995,077
51',513
952,243
423,082
276,548
917,428
75,951
.587,939
69,489
719,839
3,043,041
157,437
46,959
627,523
394,320
190,989
352,418
46,033
76,699
30,468
2.5.
16.1
1,065
1,459
September 29, 1998 .
28,318,296
Source: Internal Revenue Service, "Statistics of Income Bulletin," Spring, 1998, pgs. 151-203.
Note: The credit amount claimed may be different from the amount actually paid.
1,378
1,502
1,338
1,378
1,483
1,371
1,333
1,302
1,551
1,404 .
1,484
1,625
1,436
1,272.
1,445
1,306
1,394
1,359
1,372
1,425
�January 31, 2000 .
MEMORANDUM FOR THE PRESIDENT
FROM:
GENE B. SPERLING .
SUBJECT:
.BACKGROUND FOR PRESS INTERVIEWS ON LONGEST
ECONOMIC EXPANSION
The economic expansion has now gone on for 106 consecutive months - making it tied
with the 1961-69 expansion for the longest expansion ever. By the end of February, it will be the
longest economic expansion ever. As you have seen, the media has already begun to write
extensive1yabout the currerit expansion and its .causes .. I believe that we should make a strong
case for the role you' have played in contributing to this historic achievement. Our tone,
however, shoJlld not be overreaching. We do not want to be perceived as waging a campaign on
this issue. Nor do we want.to be seen as claiming total credit. Instead, our goal should be to
ensure thatthe media is fair in reflecting your important contribution to the longest expansion.
Attached you will find some interesting statistics that help elaborate your message'. The
best four point message for you to hit is th~ following:
• By 1992, American industry was going through a restructuring and becoming more
competitive. But there was a "deficit premium" that kept interest rates high even at a time of
low growth. High interest rates, high unemployment, high budget deficits, and shaky
confidence about whether or not there would be a double-dip recession were discouraging
investment and growth.
• In 1993, the commitment to fiscal discipline eliminated,the "deficit premium"at a critical
time, fundamentally changing expectations and the investment climate of the American
economy.
• The bipartisan 1997 Balanced Budget Act, the commitment to opening markets abroad,
commonsense regulatory refo'rm, and respecting the independence of the Federal Reserve
have all helped maintain low interest rates and high confidence in the American economy.
• The key to understanding the contribution of the fiscal policy to this expansion is the magic
of an investment-led recovery: low interest rates and high investment have bu~lt capacity and
productivity,.enabling the economy to grow strongly without inflation.
Attached also are responses to four different claims about who deserves credit for the
longest expansion: (1) President Reagan, (2) President Bush, (3) Chairman Greenspan, and
(4) new economy innovators like Steve Case and Bill Gates.
�HOW THE CLINTON-GORE ADMINISTRATION'S ECONOMIC STRATEGY HAS
CONTRIBUTED TO THE LONGEST ECONOMIC EXPANSION IN HISTORY
I - In 1992, the Nation Was Gripped By Worry About the Future and Continued Economic
Distress. President Clinton's Emphasis on Fiscal Discipline Restored Confidence,
Lowering Interest Rates and Boosting Investment. By 1992, American industry was going
through a restructuring and becoming more competitive. A "deficit premium" kept interest rates
high even in a time oflow growth. High intere$t rates, high unemployment, high budget deficits,
and shaky confidence about whe~her or not there would be a double-dip recession were
_
discouraging investment and growth. In 1993, the commitment to fiscal discipline eliminated the
"deficit premium" at a critical time, fundamentally changing expectations and the investment
cJimate of the American economy.
• "Deficit premium". As Secretary Rubin often said, interest rates were high because of the
"deficit premium." This reflected not just the substantial debt and deficit, but also the
market's lack of confidence that government would do anything to tackle these prob.lems.
• -The debt quadrupled froni 1980 to 1992: growing from $712 billion in·1980 to $3.0
trillion in 1992.
• The deficit was $290 billion in 1992 the largest deficit in history.
• In January 1993, CBO predicted that the deficit would grow to $404 billion in 1999.
This is even assuming the deficit reduction from ORRA J990, inCluding the reductions
in military spending. By turning this projected $404 deficit into a surplus of $124
billion, the President's commitment to fiscal discipline freed up half atrillion dollars
for additional investment in one single year.
• At the end of 1992, the Blue Chip was forecasting that interest rates would rise in
1993 and 1994. In December 1992, the 10-year rate was 6.8 percent. The Blue Chip
predicted 6.9 percent in ,1993 and 7.2 percent in 1994. [Numbers based on CBO analysis.]
• High interest rates. In the early 1990s, long-term interest rates were very high despite the
fact that the economy was growing slowly:
• The 30-year Treasury bond averaged 8.2 percent from 1989 to 1992. At the same
time, the economy grew only 1.7 percent annually.
• By contrast, in the last four years long~term rates have averaged 6.2 percent. At the
same time, the economy has grown 4.3 percent annually.
• Weak investment and productivity. The-two most important drivers oftne economy are
investment and productivity. Both of these were weak in the 1980s and early 1990s:
• Real productive equipment and software investment grew 3.8 percent annually under
Bush and 4.7 percent annually under Reagan and Bush. In contrast, real productive
investment has grown 12.1 percent annually under President Clinton.
• Productivity grew only 1.6 percent per year urider Presidents Reagan and Bush;
compared to 2.7 percent in the last, four years.
�,,
• Rising unemployment. Even after the recovery technically began in March 1991, growth
remained slow and unemployment was rising:
.
• In March 1991, the unemployment rate was 6~8 percent. Though it had declined
slightly from its high of7.8 percent in June 1992, by December it was still at}.4
percent.
• Worry about a double dip recession. Financial markets, economists, and American families
were worried about the future, and especially worried about the possibility of a double-dip
recession.
• In the second half of 1992 there was 'widespread concern about a double-dip or triple
dip recession. For instance, Bruce Steinberg of Merrill Lynch was quoted as saying
"The economy is comatose and shows only the faintest signs oflife right now."
[Quoted in the Washington Post, 9/26/92] .
• Growth forecasts worsened through 1992. The Blue Chip consensus forecast for
1993 GDP growth consistently worsened throughout 1992. The forecasts for 1993
only started to become more optimistic in December - after the election - and really
took off in early 1993.
'
• Greater optimism about ihe economy - and praise for President Clinton's commitment to
fiscal discipline. President Clinton's message \
oHiscal discipline garnered almost immediate
.
'
praise from financial markets, leading economists; and the American people. The result was
a quick turnaround in confidence.
.
"
• The change in confidence was reflected almost immediately in the financial press.
Some examples:
• Financial Times, 1126/93: "The market opened markedly higher as investors
and dealers got their first chance to react to Sunday's comments by Mr. Lloyd
Bentsen, the new Treasury Secretary, which suggested the White House views
cutting the deficit as a top priority."
• Wall Street Journal, 2/24/93: "The spectacular bond market rally accelerated
yesterday, with long-term Treasury bond yields plunging to another record
low as investors rushed to embrace President Clinton's economic package."
• Similar stories appeared in the New York Times, USA Today, the Los Angeles
Times, the Boston Globe, Fortune, the National Journal, and other leading
periodicals.
• Leading economic forecasters raised their growth predictions. In October 1992, the .
Blue Chip was predicting growth of2.7 percent in 1993. Six months later, they had
raised their forecast to 3.3 percent gr6wth.
2
�• Slaslting the ((deficit premium" and lowering interest rates. By convincing markets that he
was serious, the President's emphasis on fiscal discipline translated almost immediately into
'
falling interest rates:
• In December 1992, the yield on 30-year Treasury bonds was 7.4 percent. In August
1993, when the President signed his economic plan into law, the yield had fallen to
6.3 percent. That is a'reduction of over 1 percentage point in just 8 months.
,
,
• Investment-led recovery. Falling interest rates and rising confidence led to an investment
boom:.
• Real productive investment grew 11.3 percent in 1993. In comparison, investment
growth was orily 3.8 percent in the previous 4 years.
• Since then we have seen seven consecutive years of double digit investment growth
by far the longest and strongest inve'stment boom ever. (The previous record was
three consecutive years of double-digit investment growth in 1964:-66,)
• Under President Clinton, investment has accounted for 35 percent of GDP growth. In
contrast, it only accounted for 12 percent ofGDP growth under Presidents Reagan
and Bush.
• Without low interest rates and strong investment, the new economy could not have
taken off. In 1999 our annual investment in information technology was more than
3 times what it was in 1992.
• Government spending has declined and deficits have turned into surpluses. The
President's 1993 deficit reduction justified the confidence ofthe markets, reducing Federal
spending and turning deficits into surpluses.
.
• Federal spending as a share ofthe economy has not been lower since 1966. The
spending restraint under President Clinton has brought spending down from 22.2
percent ofGDP in 1992 to 18.7 percent ofGDP in 1999 -the·lowest in over thirty
years. In contrast; Federal spending as a share of the economy was unchanged from
the beginning to the end of the Reagan-Bush period .
• ' Non-defense discretionary spending fell to 3.3 percent ofGDP in 1999, the lowest on
record (comparable data goes back to 1962) ..
• Federal spending was responsible for 7 percent ofGDP growth under Presidents
Reagan and Bush. Under President Clinton it has actually fallen, and is responsible
'
for -1 percent of GDP growth.
• The largest deficit in history ($290 billion in 1992) has turned into the largest surplus
in history ($124 billion in 1999). The United States has had two consecutive
surpluses for the first time since 1956-57. This has paid down more than $140 billion
in debt in the last two years. As a result,.in 1999 the debt held by the public was $1.7
trillion lower than was predicted in 1993.
�II - The Investment-led Expansion has Produced Strong and Sustainable Growth With
Low Inflation. The key to understanding the contribution of the fiscal policy to this expansion
is the magic of an investment-led recovery: low interest rates and high investment have built
capacity and productivity, enabling the economy to grow strongly without inflation. In contrast,
by five or six years into the 1960s and 1980s expansions, the United States had rising inflation,
rising budget deficits, and slowing productivity. In the current expansion the American economy
keeps getting stronger and stronger ,over time.
• J
Consistently strong economic growth.
,',
• The economy has grown at a 4+ perceqt rate for four consecutive years. This is the
longest period ,of strong, sustained economic growth since the mid.:.1960s.
• The economy has expanded 3.9 percent annually under President Clinton - the
strongest growth since President Johnson.
.
• Investment, not 'government spendillg, has led the expansion. The record investment of the
past seven years has increased the productivity capacity of America, potentially boosting
, growth and productivity for years to come.
of GDP growth. In
• Under President Clinton, investment has accounted for
contrast, it only accounted for 12 percent of GDP growth_under Presidents Reagan
and Bush.
'
• Strong investm~nt has been the key to low inflation. In the 1960s and 19805, strong
growth strained the economy's capacity to produce, leading to rising inflation.' In
contrast, the strong investment since 1993 has kept industrial capacity growing
strongly enough to meet the increased demands of the strong economy. Thisis
shown by the fact that capacity utilization is essentially unchanged since 1993'
(capacity utilization was 81.3 in January 1993 and 81.0 in December 1999).
• Fiscal policy has been sustainable. At the same time, fiscal policy is the soundest and most
sustainable it has been in memory.
• The debt quadrupled between 1980 and 1992.
• From 1989-1992, the deficit grew. This is true even ifyou look at the underlying
structural deficit, which excludes the worsening ofthe deficit that was directly due to
the weak economy.
'
'. From 1993-1999, there have been. seven consecutive years offiscalimprovement for
the first time in American history. This is true even ifyou look at the underlying
structural deficit, which excludes the fiscal improvements that are directly due to the
strong economy.
• We are on track to pay offthe debtby 2013, making America debt free for the first
time since 1835.
4
�• Inflation has been low and stable. Rising inflation was one of the' main factors in ending
previous expansions. We saw this toward the end of the 1960s and toward the end of the
1980s. In contrast, inflation is now the lowest it has been in over three decades:
• In 1999, the underlying core rate of inflation was 1.9 percent the lowest rate since
1965.
• In 1999, the GDP price index rose 1.4 percent. This follows 1.2 percent growth in
1998, which was the lowest rate since 1963.
• Productivity growth is rising. During previous expansions -like the 1960s and 1980s
productivity growth slowed down as the expansion continue,d. In contrast, productivity
growth is currently rising:
• Productivity growth fell to 0.9 percent from 1987-89 - this is le~s than half of what
productivity growth had been earlier.
• In contrast, productivity growth in the last four years was 2.7 percent - double the
rate of productivity grow~h earlier in the expansi?n.
5
�III - President Clinton Placed an Empbasis on Policies tbat Ensure tbat All Americans
Sbare In tbe Benefits ofTbis Growtb. A key contrast between the economy under President
Clinton and the economy in the 1980s is that the dividends of economic growth have been shared
widely, instead of going entirely to the best off. Policies like exppnding the Earned Income Tax
Credit, raising the minimum wage, and investing in people l}ave been important factors in our
shared growth.
• Rising incomes for all groups under President Clinton.
• Between 1981 and 1993, the bottom quintile of the income distribution saw their
inflation-adjusted incomes fall by 4.4 percent. From 1993-98, the inflation-adjusted
incomes in the bottom quiritile rose 10.3 percent.
• At the same time, from 1981,to 1993, the topquintile of the income distribution saw
its income rise by 26.4 percent. From 1993-98, the top q)lintile saw its income rise by
'_ 11.7percent virtually the same as the rise for each of the bottom four quintiles.
• Stopping the trend ofrising ine9uality.
• Between 1981 and 1993;inequality increased sharply.
• Between 1993 and 1998 inequality was unchanged. This is even true using measures
that include both capital gains and taxes and transfers (like the EITC).
• Reducing poverty.
• From '1981 to 1993, the poverty rate rose from 14.0 percent to 15.1 percent - an
-additional 7.4 million people in poverty;
• Since 1993, strong and balanced growth have reduced poverty:
• 7.7 million people lifted out of poverty sinpe 1993.
• Poverty rate is the lowest since 1979.
• African-American poverty is lowest on record.
• Hispanjc poverty is lowest since 1979.
• Single mother poverty is lowest on r~cord.
• Policies to ensure that everyone shares in the growth ofthe economy.
• The 1993 expansion of the EITC provided a tax break for 15 million working
families. In 1998, 4.3 million people were.lifted out of poverty by theEITC - double
the number lifted out in 1993.
• In 1996, the President signed a law raising the minimum wage from $4.25 $5.15.
This directly increased wages for 10 million workers.
• Investing in people has helped ensure that the benefits of growth are widely shared.
to
6
�IV - Opening Markets Abroad, Commonsense Regulatory Reform, and Respecting the
Independence of the Federal Reserve Have All Helped Maintain Low Interest Rates and
High Confidence. By emphasizing sound economic management - and showing the political
courage to implement it the President helped to spur investment and economic growth.
• Opening markets abroad, and willingness to take on Democrats when necessary to do so.
The President sent a clear message about his pro-growth, pro-opportunity agenda through his
strong support for NAFT A and the Uruguay Round which created the World Trade
Organization. He showed that he was willing, when necessary, to take on his own party in
order to do what was right for the economy and the American people.
.•
•
NAFTA passed with only 102 Democratic votes, with 156 voting against.
Leading private-sector economists praised President Clinton's commitment~o
. NAFTA and the GATT. In April 1993, a survey by the Blue Chip of 51 leading
economists named it the most important part of President Clinton's economic plan.
(The survey found that the second most important part ofthe President's plan was
reducing spending by cutting the Federal workforce).
• Since 1992, we have negotiated over 275 separate trade agreements, including
NAFTA; the Uruguay Round, which created the World Trade Organization; a WTO
accession agreement with China; and three recent multilateral agreements in financial
services, infonnation technology, and basic telecommunications.
• Commonsense Regulatory Reform. Regulatory refonn in everything from
telecommunications to the financial system to the environment has helped unleash the
productive potential ofthe private sector.
• Respecting the independence ofthe Federal Reserve. Previous Administrations had
undennined the confidence of markets by openly disagreeing ,with the Federal Reserve.
From the very first day, the Clinton Administration adopted a' policy of respecting the
Federal Reserve's independence.
• The Administration recognized that by doing its job well- especially fiscal policy
then the Administration would make the Federal Reserve look good. Similarly, by
the Federal Reserve dqing it's job, it would make the Administration look good.
,
• Appointing leading figures to. key economic positions. A crucial part of the Clinton
Administration's contribution to restoring confidence and producing strong economic growth
has been appointing respected figures to l<,ey economic positions.
.
• Secretary Bensten was one of the most experienced Senators and a bulwark of fiscal
discipline .
• , Secretary Rubin's financial background was essential to maintaining the confidence
. of markets, including bond ma~kets and foreign exchange markets.
• Chainnan Greenspan is widely; and justifiably, acclaimed as one of the most effective
Federal Reserve chainnan ever. President Clinton re-nominated him Fed Chainnan
twice.
7
�QUESTIONS AND ANSWERS ON THE LONGEST EXPANSION IN HISTORY
QUESTION: Aren't Reagan's tax cnts and deregulation responsible for the expansion?
ANSWER:
• Of course not. That was a period when the debt quadrupled, creating the conditions for a
"deficit premium" a situation where we had high interest rates even with slow growth. People
were writing books with titles like America: What Went Wrong? Some of your newspapers
were shaky about whether there would be a double dip recession.
• Washington Post,.Steven Mufson and John Berry, 9/10/92: "Americans have been
unable to mount a convincing economic recovery.:. the economy is crawling forward so
slowly that it appears to be standing stilL .. In some statistical categories ... there has
even been a 'triple dip. '"
• When we came into office, one thing everyone agreed about our economic plan is that it would
make a big difference. Some said it would turn around the economy. Others said it would be a
job killer. I'm sure my staff can show you what different people were saying in that year. So to
come around now and say 1993 was irrelevant, and everything good is due to President
Reagan's tax cuts is not reasonable.
• President Reagan's tax cuts and mindless deregulation fueled a decade of unsustainable and
unbalanced growth:
• Reagan's tax cuts led to quadrupling the debt, culminating in the $290 billion deficit in
1992 the largest deficit in American history.
• Productivity growth declined over the course of the expansion ..
• The real estate bust and the savings and loan crisis were two of the results df the
mindless deregulation under Reagan.
�QUESTION: Didn't the expansion start under George Bush?
ANSWER:
• The official beginning ofthe expansion is March 1991. But 1991 and 1992 were years of weak
economic performance and shaky confidence.
• Rising unemployment rate. In March 1991, the unemployment rate was 6.8 percent. Though it
had declined slightly from its high of7.8 percent in June 1992, by December it was still at 7.4
percent.
• No sustained growth. Although the economy grew strongly at the end of 1992, much of this
was, due to temporary and unsustainable factors. This is evidenced by the fact that the economy
contracted 0.7 percent in first qUarter of 1993.
• High interest rates. The 30-year Treasury bond averaged'7.67 percent in 1992
than it was in 1991.
'
not much lower
• Deficit projected to rise. In January 1993 CBO projected the deficit would rise from $290
billion in 1992 to $404 billion in 1999 and $653 billion in 2003. This is even with the 1990
deficit reduction plan, and the associated military spending reductions, in place.
• In the second half of 1992 there was widespread concern about a double-dip or triple-dip
receSSIOn:
• Bruce Steinberg at Merrill Lynch: "The economy is comatose and shows only the
faintest signs of life right now." [Quoted in the Washington Post, 9126/92]
• Alan Sinai: "There are real signs here that the economy is sliding badly, surprisingly
badly." [Quoted in the Washington Post, 9126/92]
,
• Washington Post, Steven Mufson and John Berry, 911 0/92: "Americans have been
unable to mount a-convincing economic recovery ... the economy is crawling forward so
slowly that it appears to be standing still ... In some statistical categories ... there has
even been a 'triple dip. '"
• USA Today, Mark Memmot, 7/23/92: "First came the recession, which began in July '90
and seemed to end in early '91. Then there was the disappointing stall the second half of
last year not another recession; but enough of a slowdown in sales and rise in
unemployment to get people talking about a double-dip economy. Now there are
rumblings about a triple dip. "
• Charles Krauthammer: "The most recent economic news points to the possibility that
the country may be heading for a triple-dip recession. Historians may look back on the
Bush presidency as 'the beginning ofa Great Recession, a period of prolonged econpmic
stagnation." [Chicago Sun Times, 7112/92]
2
�QUESTION: Isn't Alan Greenspan responsible for the expansion?
ANSWER:
• I think everyone recognizes that you need both good fiscal policy and good monetary policy.
Unsound fiscal policy can make monetary policy difficult ifnot impossible. We have seen how
difficult it is for countries around the world use monetary policy to keep growth high and
inflation low when the budget deficit i$ out of control. Fiscal discipline is a necessary
ingredient to having strong growth and low inflation.
• I've always had the view that the better I do my job, the easier it is for Chairman Greenspan to
do his job. And I believe Chairman Greenspan feels the same way.
Background
• When he was re-nominated Federal Reserve Chairman on January 4, 2000, AUm Greenspan
said, "My colleagues and I have been very appreciative of your [President Clinton's] support of
the Fed over the years, and your commitment to fiscal discipline, which ... has been instrumental .
. in achieving what in a few weeks ... will be the longest economic expansion in the nation's
history."
�QUESTION: Isn't the new economy - and people like Steve Case and Bill Gates - responsible
for the expansion?
ANSWER:
• I believe for a country to tum around its economic situation, everyone has to do their part.
Clearly the infonnation technology revolution - and the people that have made it - are
remarkable.
• A lot of good things were going on in the private sector, restructuring to make it more
competitive, in the early 1990s. But government was creating an unfavorable climate for
innovators to invest and grow. By lowering the deficit, lowering interest rates, and creating
conditions for an investment-led recovery, we didn't create the gro'Yth, but we did create a
better fiscal situation for innovators to invest and grow in.
• , Annual investment in infonnation technology in 1999 was more than 3 times higher
than it was in 1992 (adjusting for inflation):
• Just as government investments in research and development in the past have helped lay the
foundation for the Internet and the strong economy today" I have been strongly committed to
increase support for researchand development to' ensure that pr<:>ductivitx growth is strong for
decades to come:
• The FY 2001 budget includes ~ nearly $3 billion increase inthe ~'Twenty-First
Century Research Fund," includirig double the largest dollar increase for the
National'Science Foundation in its 50 year history.
Background
• Infonnatlon technology only includes 8 percent of our employment, but it accounts for a third of '
our economic growth.
• Jobs in infonnation techno\ogy p~y wages 77 percent <olbove the private s'ector average.
4
�.'
,
.'
. 20 MILLION NEW JOBS
THE CLINTON-GORE RECORD ON JOB CREATION
.
.
'
..
The White House
December 3, 1999
1
�20 MILLION NEW JOBS UNDER THE CLINTON-GORE ADMINISTRATION. In 1992, when
Bill Clinton was elected President, the American economy was barely creating jobs, wages were stagnant,
and the unemployment rate was 7.5 percent. His bold, three-part economic strategy focused on three
objectives: fiscal discipline to help reduce interest rates and thereby spur business investment; invest in
education, health care, science and technology so that America can meet the challenges of the
21 st century; and open foreign markets so that American workers have a fair chance to compete abroad.
Seven years later, the results are in.
J013SARE UP
.20.0 Million New Jobs Created Under the Clinton-Gore Administratio~. Since 1993, the
economy has added 20.0 million new jobs. That's the most jobs ever created under a single
Administration - and more new jobs than Presidents Reagan and Bush created during their three
terms. Under President Clinton, the economy has added an average of 244,000 jobs per month, the
highest of any President on record. This compares to 52,000 per month under President Bush and
167,000 per month under President Reagan.
• 92 Percent - 18.5 Million - of the New Jobs Have Been Created in the Private Sector. Since
President Clinton and Vice President Gore took office, the private sector of the economy has added
18.5 million new jobs. That is 92 percept of the 20.0 million new jobs - the highest percentage since
Harry S. Truman was President and presiding over the post-World War II demobilization.
• Most Rapid Growth in Construction Jobs In 50 Years. After losing 662,000 jobs in construction
during the previous four years, 1.9 million new construction jobs have been added during the Clinton
Gore years - that's a faster annual rate (5.1 percent) than any other Administration since HarryS.
Truman was President.
• Most Rapid Growth in Auto Jobs in More than' 30 Years. After losing 46,000 jobs in the
automobile industry during the previous 4 years, 156,000 new auto jobs have been added under
President Clinton's leadership - that is a faster annual rate of auto job growth (2.5 percent) than any
other Administration since Lyndon B. Johnson was President.
• Manufacturing Jobs Are Up Under President Clinton After Falling Sharply During the
Previous 12 Years. Although economic troubles in East Asia have dampened U.s. exports and
reduced manufacturing jobs over the last 18 months, manufacturing jobs are up 252,000 overall under
President Clinton, after declining by 2.1 million under Presidents Bush and Reagan.
WAGES ARE UP
• Eighty-one Percent ofthe New Jobs Since 1992 Have Been High-Wage Jobs. According to a
study by the Council of Economic Advisers and the U.S. Department of Labor, 81 percent of all new
jobs are located in industrY/occupation categories that pay above-median wages.
�• . Fastest and Longest Real Wage Growth in Two Decades. In the last 12 months, average hourly
earnings have increased 3.6 percent - faster than the rate of inflation. This marks the fourth
consecutive year of real wage growth - the longest consecutive increase since the early 1970s. Under
President Clinton, real wages are up 6.5 percent, after declining 4.3 percent during the Reagan and
Bush years .. Real wage growth in 1998 reached 2.6 percent -the largest increase since 1972.
• Real Wage Gains Across the Income Spectrum. While real wages fell for the typical worker
.between 1981 and 1993, the declines for poorer workers were even more severe. Under President
Clinton and Vice President Gore, all groups have shared in rising real wages - with some of the '
largest gains enjoyed by hard-pressed working Americans. According to a study by the Council of
Economic Advisers and the U.S. Department of Labor, between 1994 and 1998, workers at the bottom
of income distribution (at the 10th percentile) saw a 1.2 percent average annual growth in wages
about the same as the 1.3 percent average annual growth of workers at the top of the income
. distribution (at the 90th percentile).
'
UNEMPLOYMENT IS DOWN
• The Largest Decline in Unemployment of Any Administration in Over 50 Years. Under
President Clinton, the unemployment rate has declined from 7.3 percent in January 1993 to 4.1
percent in November 1999. This 3.2 percentage point decline is the largest under any single
Administration since Franklin D. Roosevelt was President.
.
• Unemployment at 4.1 Percent in.November - the Lowest in Nearly 30 Years. In November, the
unemployment rate fell to 4.1 percent. It has remained below 5 percent for 29 months in a row ~ that
is the lowest unemployment rate since January 1970. For women the unemployment rate was 4.2
percent - staying around the lowest level since 1953.
• African American and Hispanic Unemployment Rates Reached Record Lows in 1999. The
unemployment rate for African Americans has fallen from 14.2 percent in 1992 to 8.1 percent in
November 1999. In the last year, African-American unemployment has fallen to the lowest rate on
record. The unemployment rate for Hispanics has fallen from 11.6 percent in 1992 to 6.0 percent in
November 1999. In the last year, Hispanic unemployment has fallen to the lowest rate on record.
INFLATION IS DOWN
• Inflation - Lowest Since the 1960s. Inflation remains virtually non-existent, with the underlying
core rate of inflation at 1.9 percent this year - the lowest rate since 1965. In the last four quarters the
GDP price index has risen 1.3 percent - the lowest rate of increase since 1963.
�*rotal is for November; latest available state data is for October.
�AFTER NEARLY SEVEN YEARS, THE RESULTS OF PRESIDENT CLINTON AND VICE PRESIDENT
GORE'S ECONOMIC LEADERSHIP FOR THE AMERICAN PEOPLE ARE CLEAR. In 1992, when Bill
Clinton was elected President, the American economy was barely creating jobs, wages were stagnant, and the
unemployment rate was 7.5 percent. His bold, three-part economic strategy focused on three objectives: fiscal
discipline to help reduce interest rates and thereby spur business investment; invest in education, health care,
science and technology so that America can meet the challenges of the 21 sl century; and open foreign markets so
that American workers have a fair chance to compete abroad. Today, many more Americans are sharing in the new
economic prosperity and joining the circle of opportunity.
Jobs Are Up: More Than 20 Million, Created Since January 1993
• 1988-1992. The private-sector was barely creating jobs and had experiencedone of the worst four-year periods
ofjob growth in history.
,
• Today. The economy has created 20.0 miHion new jobs since January 1993, with 18.5 million in the private
sector alone, a faster annual growth rate than any Republican Administration since the 1920s.
Unemployment Is Down: The Lowest Peacetime Rate in 29 Years
• 1981-1992. The unemployment rate averaged 7.1 percent and rose to more than 10 percent in 1982 and 1983.
• Today. In November, the unemployment rate was 4.1 percent - the lowest level in nearly 30 years. The
unemployment rate has been below 5 percent for 29 consecutive months.
Deficit Eliminated: Two Consecutive Budget Surpluses
• 1992. The deficit was $290 billion - the highest dollar level in history. When President Clinton took office, the
Congressional Budge Office projected that the deficit would hit $404 billion in 1999, and head higher.
• Today. In 1999, we had a budget surplus of$124 billion - the largest dollar surplus on record (even after
adjusting for inflation) and the largest as a share, of our economy since 1951. With the President's plan, we are
now on track to eliminate the nation's publicly held debt by 2015.
Faster Economic Growth: 3.8 Percent Per Year
• 1981-1992. The economic grew an average 1.7 percent per year under President Bush and 2.8 percent per year
during the Reagan-Bush years.
.
• Today. Since President Clinton took office, growth has averaged 3.8 percent per year.
Private-Sector Growth Is Up: 4.3 Percent Per Year
• 1981-1992. The private sector ofthe economy grew 2.9 percent annually from 1981-1992.
• Today. The private sector ofthe economy has grown 4.3 percent annually since 1993.
Equipment and Software Investment Is Growing Faster Than Ever
• 1988-1992. Real equipment and software investment rose just 3.8 percent annually during the previous
Administration.
• Today. Real equipment and software investment is up 12.5 percent per year - faster than any Administration
on record.
Unemployment for African Americans Declined Dramatically
• 1981-1992: AfricanAmerican unemployment reached 21.2 percent in January 1983- a record high, and never
dropped below 10 percent.
• Today. The African-American unemployment rate has fallen from 14.2 percent in 1992 to 8.1 percent in
November 1999. In the last year, African-American unemployment has fallen to the lowest rate on record.
�Unemployment for Hispanics Recovered From Record Highs to Achieve Record Lows
• 1981-1992,. Hispanic unemployment hit a.record high of 15.7 percent in 1982.
• Today. The Hispanic unemployment rate has dropped from 11.6 percent in 1992 to 6.0 percent in November
1999. In the last year, Hispanic unemployment has fallen to the lowest rate on record.
Real Wages Rising Again: Fastest Growth in Two Decades
• ' 1981-1992. Real average hourly earnings fell 4.3 percent under Presidents Reagan and Bush.
• Today. Real wages have grown 6.5 percent under PresidentClinton. In '1998, real wages were up 2.7 percent
- that's the fastest annual real wage growth in over 20 years.
Real Wages for African Americans Rising Sharply After A Decade of Decline
• 1981-1991. Median weekly earnings dropped 3 percent, after adjusting for inflation.
• Today. Median weekly earnings rose 7.3 percent between 1996 and 1998, after adjusting for inflation.
Real Wages for Hispanics Rising After A Decade of Sharp Decline
• 1981-1991. Median weekly earnings dropped 8.5 percent, after adjusting for inflation.
• Today. Median weekly earnings rose 3.8 percent between 1996 and 1998, after adjusting for inflation.
Poverty For African-Americans Dropped to Lowest On Record
• 1981-1992. Between 1980-1992, the poverty rate for African American remained at 30 percent or more.
• Today. Since 1993, the African-American poverty rate has dropped from 33.1 percent to 26.1 percent in 1998
- that's its lowest level recordedand that's the larges,t five-year drop in African-American poverty in more than
a quarter century (1967-1972).
Poverty For Hispanics Dropped to Lowest Since 1979
• 1981-1992. Between 1980-1992, the poverty rate for African American increased from 25.7 percent to 29.6
percent.
• Today. Since 1993, the Hispanic poverty has dropped to 25.6 percent-the lowest since 1979.
Family Income Up More Than $5,000 Since 1993
• 1988-1992. Median family income, adjusted for inflation,Jeli by $1,864, dropping from $44,354 in 1988 to
$42,490 in 1992.
• Today. Since 1993, real median family income has increased by $5,046, rising from $41,691 in 1993 to
'$46,737 in 1998.
Welfare Rolls Dropped Dramatically: Lowest Since 1969
• 1981-1992. The number of welfare recipients increased by almost 2.5 million (a 22 percent increase) to 13.6
million people.
• Today. The number of welfare recipients dropped by almost 6.8 million (a 48 percent decline) to 7.3 million
between January 19~3 and March 1999 - the lowest level since 1969.
Homeownership Is Up: The Highest in American History
• 1981-1992. The homeownership rate fell from 65.6 percent in the first quarter o( 1981 to 63.7 percent in the
first quarter of 1993 .
• , Today. In the third quarter 1999, thehomeownership rate was 67.0 - the highest ever recorded.
�INDEPENDENT ASSESSMENTS OF THE CLINTON-GORE ECONOMIC RECORD
Fortune, 10/3/94: "[President Clinton's] economic plan helped bring interest rates down, spurring the
recovery. "
Paul Volcker, Former Federal Reserve Board Chairman,Audaciry, Fa111994: "The deficit has come down
and I give the Clinton Administration and President Clinton a lot ofcreditfor that.... and I think we are seeing
some benefits. "
Alan Greenspan, Federal Reserve Board Chairman,2/20/96: "The deficit reduction [from 1993}. .. was an
unquestioned factor in contributing to the improvement in economic activity that occurred thereafter. "
David Wyss, DR;IlMcGraw-Hill, 6/10/96: "Ifyou look at the economy during the Clinton Administration,
you have to say that it's been a success. We. have low irif[ation, full employment, and steady growth. This is
really just about the best ofall macroeconomic worlds. "
U.S. News and World Report, 6/17/96: "President Clinton's budget deficit program begun in 1993... [led]
·to low interest rates, which begat greater investment growth (by double digits since 1993, the highest rate
since the Kennedy administration), which begat three-plus years ofso lid economic growth averaging 2.6
percent annually, 50 percent higher than during the Bush presidency. "
Business Week, 5/19/97: "Clinton's 1993 budget cuts, which reduced projected red ink by more than
$400 billion over five years, sparked a major drop in interest rates that helped boost investment in all the
equipment and systems that brought forth the New Age economy oftechnological innovation and rising
productivity.· "
Goldman Sachs, March 1998: Calling this "the best economy ever", Goldman Sachs reports that
"trade, fiscal, and monetary policies have been excellent, working in ways that have facilitated growth
without inflation. The Clinton Administration has worked to liberalize trade and has used any revenue
windfalls to reduce the federal budget deficit. "
Financial Times (London), 5/13/99: "[The] 1993 deficit reductionplan ... put the US on coursefor its
first budget surpluses in almost thirty years. This in turn allowed the lower interest rates that havefuelled
the expansion. "
�REPUBLICAN NAY-SAYERS PROVED WRONG
New Yorker,6110/96: "With interest rates so low, the economy grew at a rate that made a
mockery ofthe Republ~cans' dire predictions."
Representative Newt Gingrich: "The tax increase will kill jobs and lead to a recession, and the
recess~on will force people offofwork and onto unemployment and will actually increase the deficit. "
[Atlanta lournal-Constitution, 8/6/93.]
Senator Phil Gramm, 8/5/93: "We are buying a one-way ticket to a recession. "
Representative John Kasich: "... We're going to find out whether we have higher deficits, we're going to
find out whether we have a slower economy, we're going to find out what's going to happen to interest
rates, and it's our bet that this is a job killer... " [Republican Press Conference, 8/3/93.]
"It's like a snake bite. The venom is going to be injected into the body ofthis economy, in our judgement
and it's going to spread throughout the body and it's going to begin to kill the jobs that Americans have. "
[Congressional Record, 3/18/93.]
Representative Dick Armey: "The impact on job creation is going to be devastating. " [CNN, 8/2/93.]"
"... will grow the Government and shrink the economy. It will mean/ewer jobs for ordinary Americans."
[Congressional Record, 8/5/93.]
Senator Connie Mack: "This ·bill will cost America jobs, no doubt about it. " [Congressional Record, 8/6/93.]
Representative John Boehner, 3/31/93: "... we want to do something about reducing the budget deficits
in this country and this budget resolution does nothing, absolutely nothing to reduce the huge budget
deficits that we have had. "
'.
�
Dublin Core
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Title
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Ruby Shamir - Subject Series
Creator
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First Lady's Office
Ruby Shamir
Is Part Of
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<a href="http://clinton.presidentiallibraries.us/items/show/36351" target="_blank">Collection Finding Aid</a>
<a href="http://catalog.archives.gov/id/7763277" target="_blank">National Archives Catalog Description</a>
Identifier
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2012-0565-S
Description
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Ruby Shamir held the position of Policy Advisor and Assistant to the Chief of Staff in the First Lady’s Office. Previously, she served as Assistant Director for Domestic Policy in the Domestic Policy Council. This series of Subject Files contains materials relating to domestic policy topics, especially on children’s issues such as health, education, child care and youth violence. The records include memorandum, faxes, letters, reports, schedules, and publications.
Provenance
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Clinton Presidential Records: White House Staff and Office Files
Publisher
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Clinton Presidential Library & Museum
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Adobe Acrobat Document
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236 folders in 15 boxes
Date
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1999-2001
Text
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Paper
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EITC [Earned Income Tax Credit]/Economic Expansion
Creator
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First Lady's Office
Ruby Shamir
Subject Files
Identifier
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2012-0565-S
Is Part Of
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Box 6
<a href="http://www.clintonlibrary.gov/assets/Documents/Finding-Aids/Systematic/2012-0565-S-Shamir.pdf" target="_blank">Collection Finding Aid</a>
<a href="http://catalog.archives.gov/id/7763277" target="_blank">National Archives Catalog Description</a>
Provenance
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Clinton Presidential Records: White House Staff and Office Files
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Adobe Acrobat Document
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Clinton Presidential Library & Museum
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Reproduction-Reference
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7/22/2013
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2012-0565-S-eitc-earned-income-tax-credit-economic-expansion
7763277