Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.
What it means: The Earned Income Tax Credit (EITC) is a refundable federal tax credit available to eligible workers earning relatively low wages. (Tax credits provide a dollar-for dollar reduction of your income tax liability.)
The Explanation: As the Congressional Research Service (CRS) points out, the EITC has evolved from a relatively modest tax benefit to a significant antipoverty program.
Before the EITC, federal welfare support mainly took the form of cash payments. Policymakers worried that this was discouraging the poor from working, and so in 1975 Congress enacted a “work bonus” on a temporary basis as part of the Tax Reduction Act of 1975 and renamed it the Earned Income Tax Credit. Earned income is any money a person is paid for doing work or performing a service, and includes wages, tips, disability payments, etc.
The original EITC was targeted at the main recipients of welfare—single mothers with children—to encourage them to enter the workforce. It also had the additional purpose of reducing the tax burdens of working poor families with children. (Childless poor adults would not receive the credit until the 1990s.)
In the 1990s, the purpose of the credit was expanded to include poverty reduction, and was seen as a way to ensure that a full-time worker with children would not be in poverty.
The amount of the tax credit depends on several factors, but is generally more valuable for those with children. For 2018, the maximum EITC per taxpayer was:
$519 with no Qualifying Children
$3,461 with one Qualifying Child
$5,716 with two Qualifying Children
$6,431 with three or more Qualifying Children
In 2018, a married couple with three children and adjusted gross income of $54,998 or less could receive up to $6,444. An individual who earns $15,310 and has no children may receive up to $520.
Why it Matters: When it comes to antipoverty programs, Christians should support policies that encourage work and discourage dependency due to idleness (2 Thessalonians 3:10). By this measure, the EITC—one of the federal government’s largest antipoverty programs—has been a success that deserves our support.
The EITC has had a noticeable influence in encouraging single mothers to enter the workforce. One study found that 34 percent of the increase in employment among single mothers between 1993 and 1999 was due to legislative expansions of the EITC.
The EITC has also had a significant impact on reducing poverty among recipients with children. According to the CRS, the EITC reduces the proportion of unmarried households with three children in poverty from 40.5 percent to 32.3 percent—an astounding 20.2 percent reduction. (The EITC also has a modest effect for childless workers, reducing the proportion of their poverty from 19.9 percent to 19.6 percent—a 1.5 percent reduction.)
And although the EITC was not designed as a health or education benefit, current research suggests that it may improve the health and educational achievement of low-income populations, especially the health of children born to low-income mothers.
The U.S. Census Bureau found that when government tax and transfer programs were included in a broader measure of poverty, refundable tax credits like the EITC were estimated to reduce poverty by three percentage points. This compares to a 1.6 percentage-point reduction for food assistance (known as SNAP or the Supplemental Nutrition Assistance Program) and a 0.2 percentage-point reduction for welfare (known as TANF, or Temporary Assistance for Needy Families). The EITC is the largest refundable tax credit targeted to the poor, and as the CRS notes, previous research indicates that most of the antipoverty impact of refundable tax credits can be attributed to the EITC.
Overall, the EITC is one of the best tools we have for reducing poverty. If the EITC were treated like earnings, notes the Tax Policy Center, it would have been the single most effective antipoverty program for working-age people, lifting about 5.8 million people out of poverty, including 3 million children.
Other Stuff You Might Want to Know:
• The EITC is the third-largest social welfare program in the U.S. after Medicaid and food stamps.
• An estimated one in five people who qualify for the EITC don’t claim it on their tax returns. Those people most in danger of missing out, according to eFile.com, include: the self-employed, people living in rural areas, grandparents raising their grandchildren, recently divorced, recently unemployed, taxpayers with no children, and recipients of disability benefits.
• A primary problem with the EITC is that its complex rules and formulas make it difficult for taxpayers to comply. The 2006-2008 EITC Compliance Study found that the most frequent EITC error made by taxpayers was incorrectly reporting income—in most cases self-employment income—and the largest error was incorrectly claiming a child for the credit.
• In a random survey of 568 members of the American Economic Association taken in 2011, roughly 60 percent of economists agreed (31.7 percent) or agreed with provisos (30.8 percent) that the Earned Income Tax Credit program should be expanded.