Obama budget urges expanding earned income tax credit

WASHINGTON — President Obama's 2015 budget to be unveiled on Tuesday will include a proposal to expand the earned-income tax credit for 13.5 million low-income Americans by closing tax loopholes benefiting certain fund managers and high-income, self-employed workers.

Under Obama's proposal, 7.7 million workers would be eligible for a larger credit and 5.8 million workers would be made newly eligible for the credit.

"This expansion would address an important missed opportunity in the EITC — identified by economists of both parties — to provide support and an additional incentive to work to childless adults, while also making it available to younger workers who are currently excluded," according to a White House report detailing the plan that was released Monday evening.

With the expansion, about 500 million people's incomes will lifted above the poverty line, and about 3.3 million young workers — ages 21 to 24 — would become eligible. The proposal also calls for expanding the EITC to workers ages 65 and 66 — currently ineligible for the tax credit. It is projected to affect about 300,000 workers in the older age group.

The EITC, which was first enacted under President Ford, is one of the more popular anti-poverty programs, because it incentivizes work. But under the current standard, workers with children benefit far more than childless earners.

Under the expansion, about 75% benefiting from the expansion live in households with incomes below 150% of the poverty line, and most of the rest live in households with incomes below 200% of the poverty line.

In his State of the Union Address in January, Obama said there are few programs "more effective at reducing inequality and helping families pull themselves up through hard work than the earned income tax credit."

The $60 billion cost of the proposal would be paid in party for by eliminating two tax loopholes.

One that would axed allows managers private equity funds to receive a share of future investment returns known as "carried interest." They are able to treat that income as capital gains, which are taxed at no more than 23.8% and exempt from payroll and self-employment tax.

The proposal also calls for eliminating the so-called "Gingrich" loophole — named after the former Republican House Speaker — which allows some self-employed workers to avoid payroll taxes by establishing pass-through entities known as S-corporations and treating only a portion of their total earnings as taxable wages.