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There are only two things certain in life: death and taxes


In the wake of Republicans’ efforts to push tax reform through Congress and provide relief to millions of Americans, it is worth touching upon a tax policy—the Earned Income Tax Credit (EITC)—that could benefit those at the bottom who are left out. Though absent from the current blueprint, Paul Ryan has joined Democrats in the push for expanding the EITC, which has been described as the most effective tool for lifting families out of poverty. Despite its $60 billion annual price tag, the EITC has been favorable to those who oppose burdening employers by raising the minimum wage, since it better targets low-income workers while also increasing employment. For that reason, it has historically garnered bipartisan support.


What’s the deal with the EITC?

The federal EITC was introduced in 1975 as a means to counterbalance the payroll and Social Security taxes paid by low-income families and to offset traditional welfare assistance. It functions as a wage supplement and is fully refundable after any tax liabilities have been accounted for. Depending on marital status and number of children, households with incomes up to between $39,000 and $54,000 qualify, and those with incomes between $10,000 and $24,000 benefit the most. In 2015, the average credit received was around $3,200, averaging to about $265 a month in additional wages. Single mothers with children have consistently been the primary beneficiaries of the policy.


Why a tax policy to help the poor?

Even if you’re working, you’re still not making enough. The EITC embodies a true market failure, or the inefficient allocation of resources by the market despite an individual’s rational behavior to work for an income. The capitalist system that governs the U.S. economy has failed to compensate employees at a livable wage that can be sustained without government assistance and even further, has exacerbated income distributions amongst working Americans. The federal government as well as 26 states and the District of Columbia have intervened to augment the absence of sufficient wages paid by employers.


Does it work?

The EITC lifted 6.5 million people out of poverty in 2015, and recipients were 53.3 percent more likely to be above the poverty line compared to non-recipients. It also achieves its original goal in terms of encouraging labor force participation, and has led to increased employment amongst single mothers, in particular. It also properly targets those in greatest need such that only low-income families will receive the benefit in comparison to a low-wage earner in a high-income family (think teenagers working on their summer break). The downside—tax filing errors frequently occur, and not all eligible families apply for the credit. Is it equitable? The most prominent observation here is that the EITC generally does not benefit childless low-income workers. Thus, federal taxes continue to push this population into poverty without the same relief those with children are granted. This has been a major point of discussion for reform.


What else is missing?

With all of the available research on this policy, the missing piece of the puzzle is people. What do low-income families prefer? What are their needs? Is it helpful to receive a tax refund once a year? Do they consider it additional income for their family? Do they even know about this benefit? Would a higher wage be a more valuable option for covering necessities on a weekly basis? Given the fact that most households are directing any refunded cash to larger transportation expenses, it is possible that other policy alternatives, like raising the minimum wage, would better serve families on a more immediate basis. Conflating the EITC’s effect on rising employment with combating poverty is dangerous, and doesn’t necessarily speak to the root of the problem—like whether families are able to put food on the table and afford childcare. Because many of these questions go unanswered, this topic ends up being a very top-down, paternalistic approach to reducing poverty.


So what?

Despite its shortcomings, the EITC (and the potential reforms to make it more inclusive) must be a part of the tax reform conversations. While some things about its impact are left unclear, it is certainly clear that low-income families have been excluded from the “biggest tax cut in U.S. history.”

Published On: November 1, 2017 |
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