The Earned Income Tax Credit (EITC) was enacted during President Gerald Ford’s administration as part of the Tax Reduction Act of 1975. It started as a temporary refundable tax credit to offset Social Security taxes paid by low income workers with children. Since then it has grown into the nation’s largest antipoverty program for working families, and it continues to enjoy widespread bipartisan support. In 2011, the latest year data is available, approximately 28 million working families and individuals claimed this tax credit.
Senator Russell Long (D-LA) introduced the EITC to blunt Congressional and Administration momentum toward instituting a negative income tax (NIT) in the late 1960s and early 1970s. A NIT is a progressive income tax structure that, rather than requiring people with earnings below a certain amount to pay taxes, instead provides them with a supplemental income from the federal government. The purpose of a NIT is to provide everyone a guaranteed minimum standard of living. Senator Long and many others opposed the NIT because it provided the largest benefits to those without any earnings, feeling it would discourage work and hurt the labor market.
In 1975, eligible taxpayers could claim a refundable tax credit equal to 10% of their earned income, up to $4,000 ($17,697 in 2014 dollars). The benefit increased as earnings increased until a taxpayer reached earnings of $4,000, at which point the credit was reduced $1 for each $10 of income in excess of $4,000, phasing out completely when earnings reached $8,000 ($35,395 in 2014 dollars).
The EITC was made permanent in 1978 and modified, providing increased credit value up to a certain level of earnings, at which it plateaus and remains flat for a period of time before beginning the phase-out period with decreasing value of the credit. The EITC retains this basic structure today. In addition, an advance payment option was added in 1978 for those who wished to receive the credit throughout the year rather than receive it all at once. There was little change to the EITC until the Tax Reform Act of 1986, at which point the value of the credit had eroded because it was not indexed for inflation. The 1986 Act increased the credit to equal the real value of the credit in 1975, indexed for inflation. The Omnibus Reconciliation Act of 1990 expanded the credit and added a supplemental credit amount for families with two or more children. In 1993 a small credit was made available for some childless workers.
Today the EITC is a fixed percentage of earnings up to a maximum, which is dependent on marital status and number of children in the family. In 2013, the maximum credits were $496 for workers with no children, $3,305 for families with one child, $5,460 for families with two children, and $6,143 for families with three or more children. The credit stays constant at that maximum until earnings increase to the phase-out range. Once phase-out begins, the credit falls with each additional dollar of income earned until it eventually disappears entirely.
In 2011, the average EITC was $2,905 for a family with children, boosting income by approximately $240 per month. Research indicates that families most often use the money received from the EITC to pay for necessities, home repairs, and maintenance on vehicles needed to commute to and from jobs. It is also used sometimes to gain additional education or training to improve employability.
Research also shows that the EITC has been successful in reducing poverty. In 2012, the EITC lifted an estimated 6.5 million people out of poverty, including 3.3 million children. One study showed that more than 50% of the decline in poverty among children from 1993-1997 could be attributed to changes in the tax code, and that the most critical change was to the EITC.
Furthermore, the EITC has been shown to reduce severe housing cost burden, which occurs when a household spends more than half of its income on housing costs. In 1999, one out of four EITC-eligible households experienced a severe housing cost burden. After adding income from the EITC, the incidence of severe housing cost burden among these households decreased by 15% overall, and by 31% among families with two children.
NLIHC’s founder, Cushing Dolbeare, suggested a change to the EITC intended to further reduce severe housing cost burdens among lower income families. She proposed that EITC recipients experiencing severe housing cost burden be eligible for an earnings-based supplement to the credit that would equal the difference between the cost of their rent and 50% of the family’s earned income plus their current EITC benefit. The benefit would be capped at the difference between 50% of the family income and the applicable local Fair Market Rent (FMR). In this way, the benefit would be tied to a family’s earnings as well as their housing costs.
The major criticisms of the EITC are that it is too complex and therefore leads to improper payments, that the credit is too small for workers with no children, and that it can impose significant marriage penalties since low income workers can lose a substantial amount of the credit if they get married to someone with moderate earnings. President Obama’s FY15 budget would double the current EITC for childless workers from $496 to $1,000, and make the credit available for taxpayers who earn $7.50 an hour and work 40 hours a week.
The EITC is a refundable federal tax expenditure. OMB estimates that in 2014 it will cost $4.3 billion in foregone taxes, and $58.4 billion in outlays, making it one of the most robust federal safety net programs.
For nearly 40 years, the EITC has been a popular and critical tool in fighting poverty, especially among families with children. While it has gone through numerous expansions and changes over the years, the underlying idea that the working poor should not be unduly burdened by taxes and should be rewarded for increasing their earning power remains.
Center for Policy and Budget Priorities. (2014). “Policy Basics: The Earned Income Tax Credit.” Washington, D.C.: Author. Holt, Steve. (2006).The Earned Income Tax Credit at Age 30: What We Know. Washington, D.C.: Brookings Institution.http://www.brookings.edu/research/reports/2006/02/childrenfamilies-holt
Hotz, V. Josheph, and John Karl Scholz. (2001). The Earned Income Tax Credit. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/papers/w8078.pdf
Lundeen, Andrew, and Kyle Pomerleau. (2014). “The Tax Changes in President Obama’s Fiscal Year 2015 Budget.” Tax Foundation.http://taxfoundation.org/blog/tax-changes-president-obama-s-fiscal-year-2015-budget.
Stegman, Michael A., Walter R. Davis, and Roberto Quercia. (2003). The Earned Income Tax Credit as an Instrument of Housing Policy.Washington, D.C.: Brookings Institution http://www.brookings.edu/~/media/research/files/reports/2003/6/metropolitanpolicy%20stegman/stegmanhousing.pdf
Tax Policy Center. (2014). “Tax Topics: Earned Income Tax Credit.”http://www.taxpolicycenter.org/taxtopics/Earned-Income-Tax-Credit.cfm
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