The 50th Anniversary of the War on Poverty

January 08, 2014

50 years ago today, President Lyndon Johnson declared a “war on poverty.” In order to fight poverty, Lyndon Johnson pushed legislation that introduced or led to healthcare programs such as Medicare and Medicaid; education programs such as Head Start; and an expansion to Social Security.

The federal government still fights poverty today, but is doing so increasingly through the tax code. Each year, the government foregoes hundreds of billions of dollars of revenue through special tax provisions for education, healthcare, and welfare. These tax provisions—whether they are deductions, exclusions, or credits—are aimed at social welfare, just as the programs introduced by President Johnson half a century ago.

The four largest and fastest growing social welfare tax preferences are aimed at healthcare, education, and welfare. The largest of these is the employer-provided healthcare exclusion, which cost the federal government $203 billion in 2013. The next largest, the Earned Income Tax Credit, provides a refundable tax credit to low-income working families, cost the federal government $58 billion in 2013. The Child Tax Credit, which provides a refundable tax credit for taxpayers with children, cost $41 billion in 2013. Lastly, the American Opportunity Tax Credit, which provides a credit for those with higher-education tuition expenses, cost the government approximately $21 billion in 2013.

According to the Treasury, approximately $445 billion went towards social welfare spending in 2013 of the approximately 1.1 trillion in total tax expenditures.

Largest Social Welfare Tax Expenditures, 2013

Provision

Amount

Employer-provided healthcare exclusion

$203 billion

Earned Income Tax Credit

$58 billion

Child Tax Credit

$41 billion

American Opportunity Tax Credit

$21 billion

Source: Treasury Department

Both parties say they want to address poverty and income inequality in 2014. President Obama has made it clear that addressing income inequality will be a major focus for the White House in 2014. From the GOP, Sen. Marco Rubio (R-FL) plans to give a speech today on economic opportunity and income inequality.

President Obama has suggested an increase in the minimum wage as a potential solution to poverty, but the economic downsides to such a proposal are clearly defined. One potential solution might be to adjust the earned income tax credit.

As structured now, the EITC has a long phase-in and a short phase-out. This creates a situation where workers with income in the phase-out range will have to pay taxes (payroll and state and federal income) not only on each additional dollar they earn, but also indirectly through lost benefits for each additional dollar they work. The way to fix this issue would be to adjust the phase-out to reduce the implicit marginal tax rate on additional hours of work.

Rather that minor fixes to components of the tax code, another potential solution that would have long-term benefits is pro-growth tax reform. Though indirect, the effects of tax reform could free up capital for businesses and individuals to invest, which would lead to more jobs and higher wages. In fact, we estimate that simply cutting the corporate and individual rate to 25 percent would increase the size of the economy by 4.74 percent, increase wages by 2.74 percent, and, most importantly for the war on poverty, create the equivalent of 5.2 million jobs.

Comprehensive, pro-growth tax reform would take us closer to achieving the goals of the war on poverty and help refocus the effort by taking economically viable steps to improve the lives of not only low-income Americans, but all Americans. 

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