ES 2.1

EFFECT OF GOVERNMENT CASH AND NEAR-CASH TRANSFER PROGRAMS ON POVERTY AMONG PERSONS LIVING IN FAMILIES WITH CHILDREN UNDER AGE 18

Although the federal system of cash and near-cash transfers (including federal income and payroll taxes)¹⁰ plays a substantial role in reducing the poverty rate of children, its collective effect has varied significantly over time. In 1979, federal cash and near-cash transfers produced a 37 percent reduction in poverty among persons in families with related children under age 18 (see Figure ES 2.1). However, by 1983, the same transfer programs produced only a 19.1 percent reduction in poverty. By 1989 the percentage poverty reduction recovered to 23.9 percent, rose again to 26.5 percent in 1993, and to 32.6 percent in 1994.

In the absence of any federal transfers and taxes, 21.4 percent of all persons living in families with children would have been poor in 1994 (see Table ES 2.1). Social insurance programs other than Social Security reduced the poverty rate to 20.6 percent. The Social Security system reduced the poverty rate further to 19.2 percent. After inclusion of means-tested cash transfers, the poverty rate fell to 17.8 percent. Food and housing benefits cut the poverty rate to 15.3 percent. Finally, the federal tax system reduced the poverty rate of all persons living in families with children to 14.4 percent.

All of the federal cash and near cash transfers considered in Table ES 2.1 except federal taxes reduced poverty among persons in families with related children under age 18 in all years. Until recently, the net impact of the federal tax system was to increase the poverty rate. By 1993, however, the impact of the tax system on the number of such persons in poverty became neutral, and in 1994, the federal tax system reduced the number of persons in poverty. This is because of the recent expansion of the Earned Income Tax Credit (EITC), which provides refundable tax credits to low-income families with children and at least one working parent whose earnings are low. Because the credit is refundable, many families eligible for the EITC receive a payment from the Treasury instead of paying federal income tax.
 

Figure ES 2.1  Percentage Reduction in the Number of Individuals in Families (with Own Children Under Age 18) Who Are Poor, Resulting from Federal Cash and Near-Cash Transfers

 

Table ES 2.1  Antipoverty Effectiveness of Cash and Near-Cash Transfers  (including Federal Income and Payroll Taxes) for All Individuals  in Families with Related Children Less than Age 18
		1979	1983	1989	1993	1994
Total population (in thousands)		133,435	132,123	135,430	144,551	145,814
Poverty rate (in percent):
	Cash income before transfers	16.6	21.9	18.6	22.3	21.4
	Plus social Insurance (other than Social Security)	15.8	20.4	18	21.4	20.6
	Plus Social Security	14.3	19.1	16.8	20.0	19.2
	Plus means-tested cash transfers	12.9	18.4	15.8	18.7	17.8
	Plus food and housing benefits	10.2	16.5	13.6	16.4	15.3
	Less Federal taxes	10.5	17.7	14.1	16.4	14.4
Total percentage reduction in poverty rate		36.6	19.1	23.9	26.5	32.6
Source: Congressional Budget Office computations using the CBO tax model, with data from the March Current Population Survey, 1980, 1984, 1990, 1994, and 1995. Table prepared by staff from the Department of Health and Human Services, Assistant Secretary for Planning and Evaluation.