EITC originated as an income supplement to help low-income workers pay Social Security taxes. Somewhere along the line its mission was expanded. Today it is a program whose benefits are heavily contingent on parenthood. The pro-procreation incentives of the tax credit have increased steadily over time:
EITC payments rise sharply as the number of children in the taxpayer’s household rises. In 2008 a family with no children received a maximum EITC payment of $438; a family with one child received up to $2,917, while two or more children bumped the maxim credit to $4,824. Thus in 2008 families with children could receive EITC refunds that were 11 times larger than those available to those with no children ($4,814 versus $438).
The pro-child bias was exacerbated when a fourth EITC bracket, for families with three or more children, was added in 2009. Subsequent inflation adjustments widened the dollar gap between the maximum refund available to the childless and those with children.
On returns filed this April (Tax Year 2017) childless families will be eligible for an EITC payment of up to $510, while a family with three or more children will receive up to $6,318. Thus, the presence of children triggers a 12-fold rise in EITC refunds in 2017.
In dollars, the refund gap between childless households and those with three or more children rose from $4,386 in 2008 to $5,808 in 2017. That’s an increase of $1,452, or 33.1 percent, in EITC’s pro-procreation incentive over this period.
While these dollar amounts may seem modest to most taxpayers, they are irresistible windfalls for low-income workers, a big incentive to procreate—or at least claim to. The IRS estimates that roughly half of the incorrect filing claims under the EITC involve fraudulent child custodial claims.1 Yet the tax collection agency does little to verify the existence of children claimed on tax returns.
But most children claimed on EITC tax returns are real—and therein lies the problem. The decision to have children may be influenced, at least in part, by the generous tax credit.
While it is impossible to determine how many births are directly attributable to the EITC, circumstantial evidence suggests a linkage. First and foremost: the rapid growth of births to immigrant mothers eligible for the EITC.
In 1970 immigrant mothers accounted for about 6 percent of U.S. births. By 2002 their share more than tripled, to 22.7 percent. (Even in 1910—the peak of the Great Wave—only 21.9 percent of births were to foreign-born mothers).2 While births to immigrants and native-born women have declined since the Great Recession, the share of all U.S. births to immigrant women in 2015—19.9 percent—is more than three times what it was prior to the EITC.
The EITC’s child-bearing incentives are far more pervasive among immigrant households:
Immigrant households with children under 18 are about 66 percent more likely to be eligible for EITC than comparable households headed by natives. This reflects their larger family size and lower average incomes.
The pro-child bearing incentives of EITC could explain why immigrant fertility rates are higher in the U.S. than in their country of origin:
Immigrant mothers from most countries have more children in the U.S. than in their home country. Throughout the world, a woman’s educational level is a key determinant of her fertility, with more educated women generally having fewer children than the less educated. Yet even after controlling for education differences, immigrant fertility is higher here than the home country.
Clearly, something happens here that does not happen there. The availability of EITC and other pro-child public benefits to low-income, poorly educated immigrants, is surely one factor.
Fertility rates for both native-born and immigrant women have dropped over the past decade. However, the latest data indicate foreign-born women of all major races and ethnicities will have more children over their reproductive lifetimes than native-born women in their respective groups. The pattern closely mirrors eligibility for the tax credit:
Fertility and EITC eligibility rates for white and Asian immigrants are well below the average for all immigrants. By contrast, Black and Hispanic immigrants were the most fertile and the most likely to qualify for the EITC in 2015. In fact, they are the only foreign-born females with Total Fertility Rates (TFRs) above the 2.1 level needed to keep population stable over the long run.
TFR represents the expected number of children a woman will have over the course of her lifetime, based on current birth rate trends. TFR comparisons are particularly useful when there are large age differences among groups. If, say, female immigrants are much younger than female natives, the TFRs of the two groups will not be affected. By contrast, birth rates—calculated as births per 100,000 population—will generally be larger in the group with the younger population.
Put differently, the TFR reflects the desire of women in various groups to have children. The prospect of a generous child benefit such as EITC can certainly affect that decision. And if history is any guide, the immigrant/native fertility gap will remain intact in future generations. That is, fertility rates of the U.S.-born descendants of today’s immigrants will exceed by a similar margin those of the descendants of today’s natives.
Even small differences in fertility rates can produce large differences in population growth if they persist over a long period of time. They are the demographic equivalent of compound interest rates. In this way immigrants influence future population growth by more than their numbers might suggest. Over time the immigrants die, but their U.S.-born offspring will have children themselves, followed by grandchildren and subsequent generations. A sophisticated population projection methodology is required to measure the impact of future immigrants on future population growth.
The Census Bureau’s 2014 national population projections are the first to incorporate separate fertility assumptions about native and foreign-born women. Higher fertility rates for immigrant women and their U.S.-born children, some of it due to EITC, is one factor behind the steady rise in the U.S. population over the 2014 to 2060 period.
Total U.S. population is expected to increase by 31 percent, or by 98.0 million, from 2014 to 2060. The native-born population will grow by 22.3 percent, while the immigrant population is projected to rise nearly four times as fast—up by 84.7 percent over the 2014 to 2060 timeframe.
Based on these figures, the foreign-born population will account for 37 percent of total population growth between 2015 and 2060. But a full accounting of immigration’s impact must add the U.S.-born children and grandchildren of immigrants arriving during this time. Census estimates that 39.8 million children—about 20 percent of all U.S. births—will be born to immigrant mothers who arrive during the projected period. We have not seen Census estimates of grandchildren. Meanwhile, about 300,000 immigrants die each year, and an equal number voluntarily leave (emigrate).
Ascertaining the impact of immigration over a multi-generation time frame is no easy matter. A comprehensive analysis would require projecting U.S. population assuming zero immigration over the 2014 to 2060 period, and comparing the results with the actual Census projections. The official 2014 national projections do not include a zero-immigration scenario. However, a 2013 Census Blog item projects the impact a zero-immigration policy would have on 2060 population.
The Census bloggers concluded that under then-current immigration policies, U.S. population would rise to 420 million in 2060, versus 341 million if no immigration were allowed over the 2012 to 2060 period. This implies that immigrants arriving over the next 45 years or so, and their U.S. born children and grandchildren, will add 79 million to U.S. population by 2060. As things stood in 2014, immigration was expected to account for more than two-thirds of U.S. population growth over the next forty-five years.
But that was BT—Before Trump. Hopefully the next set of Census projections will be based on a border wall, enhanced deportations, and lower EITC eligibility rates for illegals. Immigration’s impact on population growth will be far smaller than projected only a few years ago.
Race, ethnicity, and the EITC
Minorities qualify for the EITC at higher rates than whites because their incomes are lower. Their average credit payment is also larger due to the presence of children. The latter difference is especially pronounced for Hispanic households. The Hispanic TFR in 2015 was 2.05 children per woman. This value is higher than for any of the race groups; white and Asian TFRs are 1.75 and 1.67, respectively, and the black TFR is 1.81. The higher rate for Hispanic women is in large part due to the relatively high fertility of foreign-born women, who have a TFR of 2.38.3
Although fertility rates overall are expected to decrease, Hispanic, black, and Asian TFRs will remain above the white TFR, and immigrant fertility will remain above the native-born. The inevitable result: minorities will displace whites as the majority population group. The tipping point is a little more than a generation away, according to the 2014 national projections (see data table, page 17).
Whites were an 87 percent majority in 1950. Today (2015) they account for 62 percent of the population. While still the “majority” group, the census calculates that around 2030 the non-Hispanic white population will start to decline. According to the most recent Census projections the majority-minority crossover will occur in 2044—barely one generation removed from today.
By 2060 the Hispanic population will be 2.1 times larger than today, there will be 2.2 times more Asians, and 36 percent more blacks. By contrast, there will be 16.5 million fewer non-Hispanic whites, a reduction of 8.5 percent.
The main reason for the majority-minority transition is the persistently higher fertility rates among immigrant women. U.S.-born children of Hispanic immigrants have long since replaced Hispanic immigrants as the fastest-growing segment of the Latino population. While these children may surpass their parents in earnings and education, they are unlikely to close the gap with non-Hispanic whites.
A mother’s culture, education, and earnings potential are undoubtedly more important than the prospect of a higher EITC payment when she decides to have another child. But for many low-income immigrants, the credit is a factor. Even a tiny change in average fertility rates, when compounded over time, has enormous consequences.
A MODEST PROPOSAL
Pro-child, yet anti-marriage. Anti-poverty, yet harmful to workers whose wages rise above the poverty threshold. The EITC tries to be everything to everybody, and ends up being a complicated, fraud-riddled mess for the nation. Policymakers should restore the credit to its original mission: to offset payroll taxes paid by the poor.
To do this, policymakers should strip all child-related incentives from EITC and focus on payroll tax-related aspects of the credit. The mechanics are simple: a single EITC phase-in rate of 15.3 percent (equal to the combined Social Security and Medicare payroll-tax liability), with maximum benefits available at the poverty thresholds for single workers and families, should be made available to all taxpayers. Differentiation by family size should be left to the income tax, via personal deductions, and the non-refundable child tax credit available only for people who pay income tax.
As it stands now, EITC discriminates against low- income singles and rewards households with children. Single wage earners are taxed into poverty. For example: a 21-year-old just starting out in the workforce and making poverty-level wages of $12,500 will have a combined $956 in Social Security and Medicare payroll taxes deducted from his paycheck. Because he receives zero in EITC (childless workers below 25 are not eligible), his after-tax income is $956 below the poverty line.
The benefits of paying higher EITC benefits to young singles extend beyond income. Labor force participation rates of childless workers (the percentage who are working or actively looking for work) will rise. For decades these rates have been falling: in 1989 89 percent of childless men aged 20 to 24 with less than a high school degree were in the labor force; in 2014 only 71 percent were.
Marriage rates will also rise. In 1987, sociologist William Julius Wilson noted the correlation between falling real wages and declining marriage rates in low- income communities.4 Low employment rates and falling wages, Wilson argued, reduced the “marriageability” of young men, creating an epidemic of female-headed households. A number of studies suggest that boosting EITC for low-income singles will reduce crime rates.5
Restructuring EITC this way would accomplish three major conservative policy goals. First, it would eliminate the possibility that payroll and income taxes push workers into poverty. Second, it would eliminate the de facto marriage penalty embedded in the current EITC program. Third, the existing EITC is rife with error and fraud because of its complexity and the fact that refunds can exceed total tax liability. Eliminating child-related provisions and reducing EITC payments in line with payroll tax liability will reduce the likelihood for error and eliminate the incentive for fraud.
1. Earned Income Tax Credit: The Compliance Challenge, Century Foundation Issue Brief.
3. Steven Camarota and Karen Zeigler, Declining Fertility of Immigrants and Natives, CIS, September 2017, Table 1.
4. William Julius Wilson, The Truly Disadvantaged: The Inner City, the Underclass, and Public Policy, University of Chicago Press, Chapter 3.
5. Harry J. Holzer, Collateral Costs: The Effects of Incarceration on the Employment and Earnings of Young Workers, IZA Discussion Paper No. 3118, 2007, http://ftp.iza.org/dp3118.pdf.