Earned Income Tax Credit (US) - Impact

Impact

The EITC is the largest poverty reduction program in the United States. Almost 21 million American families received more than $36 billion in payments through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation's lowest paid working people. The Census Bureau, using an alternative calculation of poverty, found that the EITC lifted 5.4 million above the poverty line in 2010.

The stimulus effects of the EITC and other consumption-augmenting policies have been challenged by more recent and rigorous studies. Haskell (2006) finds that the unique spending patterns of lump-sum tax credit recipients and the increasingly global supply chain for consumer goods is counter-productive to producing high, localized multipliers. He places the local multiplier effect somewhere in the range of 1.07 to 1.15, more in line with typical economic returns. The lower multiplier is due to recipients emphasizing "big-ticket" durable good purchases, which are typically produced elsewhere, versus locally-produced products and services such as agricultural products or restaurant visits. However, Haskell points to a silver lining: there are perhaps more important benefits from recipients who use the credit for savings or investment in big-ticket purchases that promote social mobility, such as automobiles, school tuition, or health-care services.

Due to its structure, the EIC is effective at targeting assistance to low-income families. By contrast, only 30% of minimum wage workers live in families near or below the federal poverty line, as most are teenagers, young adults, students, or spouses supplementing their studies or family income. Opponents of the minimum wage argue that it is a less efficient means to help the poor than adjusting the EITC.

EIC follows a pattern of going up a hill, traveling along a plateau, and then going back down the hill more slowly than it went up. For example, a married couple with two qualifying children and yearly income of seven thousand dollars will receive EIC of $2,810 (going up the hill). At fifteen thousand dollars, this couple will receive EIC of $5,036 (plateau). And at twenty-five and thirty-five thousand dollars, this same couple with their two children will receive EIC of $4,285 and $2,179 respectively.

A single person (such as a single parent, aunt, uncle, grandparent, older sibling, etc.) goes up the hill at the same rate and will receive the same maximum EIC for two qualifying children of $5,036 at plateau. But the single person has a shorter plateau. And thus, a single person with two qualifying children and income of twenty-five and thirty-five thousand will receive EIC of $3,230 and $1,124 respectively (going down the hill).

EIC phases out at 16% with one qualifying child and at 21% for two children and three or more children. And thus it is always preferable to have an extra fifty dollars of actual earned income (the table for EIC steps in increments of fifty dollars).

The plateau range for Married Filing Jointly continues for five thousand dollars longer than does the plateau for the other filing statuses and thus MFJ can be advantageous for some income ranges. Single, Head of Household, and Qualifying Widow(er) are all equally valid and eligible filing statuses for claiming EIC. The only disqualifying status is Married Filing Separately. However, a couple can file as Married Filing Jointly even if they lived apart for the entire year if legally married and both agree.