New Mothers Tax Relief Proposal

Economist Robert Cherry introduces us to his new tax policy proposal, the New Mothers Tax Relief (NMTR). The proposal was cited yesterday by Nancy Folbre on the New York Times blog, Economix, and recently published in the influential policy journal, Tax Notes.

The Earned Income Tax Credit (EITC) is an important anti-poverty policy. There are, however, a number of drawbacks due to the phasing-out of benefits as household income rises. For 2011, a single mother with annual income of $15,000 and one qualifying child obtains $3,094 from the federal EITC.  If she marries a man earning $25,000 annually, virtually all of these credits would be lost. This is part of the lost benefits from means tested programs that can dissuade working mothers from marrying the father of their newly-born child. Indeed, it might be an important reason why today more than half of new mothers under 30 years old are unwed. A second problem with the current EITC is that it provides virtually no benefits to lower middle-class families with children because they have too much income to qualify.

My New Mothers Tax Relief (NMTR) proposal rectifies both of these problems. It has a more generous alternative EITC schedule for families that have one pre-school age child, allowing lower-middle income married families to gain most of the benefits now available to lower-income households. In addition, by extending these benefits, it reduces the substantial marriage penalty single working women now face.  Specifically, the more than $2,500 federal marriage penalty single mothers with incomes of $13,000 to $25,000 face would be virtually eliminated. This change will allow women giving birth to their first child a chance to base a marriage decision on factors other than the federal marriage penalty they face. In addition, it will reduce the financial strain many young married couples experience when they have very young children; a strain that causes marital discord and separation.

By providing needed funds to lower middle class married families and reducing the marriage penalty, this proposal is both pro-family and pro-marriage. It is also well targeted compared to the current payroll tax reduction where 44 percent of its benefits go to families with incomes over $100,000. By contrast, the NMTR proposal provides no benefits to these upper-middle class families. Lower middle-class families should no longer be denied the aid that they deserve when they have very young children.

Robert Cherry is Brueklundian Professor in the Department of Economics at Brooklyn College of the City University of New York and author of Moving Working Families Forward: Third Way Policies That Can Work.