The Impact of the Federal Income Tax on Poverty: Before and After the 2017 Tax Revision (“TCJA”; P.L. 115-97)

Summary

The federal individual income tax is structured so that the poor owe little or no income tax. In addition, the federal individual income tax (hereinafter referred to simply as the income tax) increases the disposable income of many poor families via refundable tax credits—primarily the earned income tax credit (EITC) and the refundable portion of the child tax credit, referred to as the additional child tax credit, or ACTC. These credits are explicitly designed to benefit low-income families with workers and children and can significantly boost families’ disposable income, lifting many of these families above the poverty line.

Using the federal government’s Supplemental Poverty Measure (SPM), CRS estimates that under current law, the income tax reduced total poverty by 15% (from 14.5% in poverty to 12.3% in poverty). The impact of the income tax on the overall poverty rate was larger than the impact of many needs-tested benefits programs targeted toward the poor. In contrast, the income tax’s ability to lift the poorest Americans out of poverty—to reduce the “poverty gap”—was limited in comparison to many needs-tested programs. (The poverty gap is the difference between the poverty threshold and a family’s disposable income, aggregated over all poor families, and is a measure of the degree of poverty.) CRS estimates that under current law, the income tax reduced the poverty gap by about $13.9 billion annually (from $150.8 billion to $136.9 billion), approximately half the effect of other needs-tested programs.

Virtually all of the poverty reduction from the income tax—both in terms of reducing poverty rates and the poverty gap—was concentrated among families with children and workers. For example, CRS estimates that poverty among children who lived in families with workers fell by almost 40% (from 14.7% in poverty to 8.9% in poverty) as a result of the income tax. For nonaged (i.e., nonelderly) adults in families with children and workers, poverty fell by almost a third (from 12.3% in poverty to 8.3% in poverty). (In contrast, CRS estimates that the poverty rates among individuals who lived in families with no workers were unchanged by the income tax.) Similarly, all of the estimated $13.9 billion in poverty gap reduction from the current income tax occurred among families with children and workers.

The current income tax includes the effects of legislative changes made by P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA). The TCJA made numerous changes to the federal income tax system, including many that affect individuals and families. A comparison of the effect of the current income tax (i.e., the post-TCJA income tax) and the pre-TCJA income tax on poverty rates and the poverty gap (assuming all else unchanged) provides one measure of the law’s impact on poverty. CRS estimates suggest that the TCJA marginally reduced poverty rates and the poverty gap, with the impact of the post-TCJA income tax similar to the impact of the pre-TCJA income tax. This suggests the law provided relatively small benefits to poor families.

Insofar as policymakers are interested in expanding the antipoverty impact of the income tax, they could expand or modify the EITC or ACTC, or create new refundable tax credits targeted toward the poor. However, refundable tax credits are subject to several limitations as a poverty reduction policy: the current credits primarily benefit those who work (and have children), limiting their ability to reduce poverty among those who do not or cannot work; they are received only once a year when income tax returns are filed, limiting their ability to help the poor meet ongoing basic needs; and they are difficult for the IRS to administer, subjecting the credits and their recipients to additional scrutiny.

Overview of the Estimated Antipoverty Impact of the Federal Income Tax

Estimated Before-Tax and After-Tax Poverty Rates for Selected Individuals

After Tax

Individual by Family Type

Before Tax

Current Law

Income Tax

(Post-TCJA)

Prior Law

Income Tax

(Pre-TCJA)

All Individuals Living in Families of All Types

14.5%

12.3%

12.5%

Children

17.5%

12.0%

12.3%

Nonaged Adults in Families with Children

14.5%

10.6%

10.8%

Individuals Living in Families with Workers

10.8%

8.1%

8.3%

Children

14.7%

8.9%

9.2%

Nonaged Adults in Families with Children

12.3%

8.3%

8.5%

Individuals Living in Families with No Workers

34.7%

34.7%

34.7%

Children

64.1%

64.1%

64.1%

Nonaged Adults in Families with Children

64.3%

64.3%

64.3%

Estimated Before-Tax and After-Tax Poverty Gap for Selected Poor Families

After Tax

Family Type

Before Tax

($ in billions)

Current Law

Income Tax

(Post-TCJA)

($ in billions)

Prior Law

Income Tax

(Pre-TCJA)

($ in billions)

All Poor Families

150.8

136.9

138.1

Poor Families with Children

52.3

38.3

39.1

With Workers

37.8

23.9

24.7

With No Workers

14.5

14.5

14.5

Poor Families with Aged Adults, but no Children

29.5

29.6

29.6

Poor Families without Children or Aged Adults

69.1

69.0

69.4

Source: CRS estimates using TRIM3 and the ASEC 2017. For methodology, see Appendix A.

Note: The 2018 parameters of the current-law income tax (post-TCJA) and the prior-law income tax (pre-TCJA) are modeled. Due to data limitations, the impacts of the federal income tax in effect in 2018 (both pre- and post-TCJA) are modeled as if they were in effect in 2016. Items may not sum to totals due to rounding.