Most Americans aren’t expecting to find a beneficial program hiding in their tax return. Yet the Earned Income Tax Credit (EITC), despite its dull name, is just that. In 2013, the EITC brought 6.2 million workers above the poverty line and boosted the incomes of 21.6 million other low-income Americans. Although welfare programs primarily occupy the political spotlight, the EITC is one of the largest and most successful antipoverty programs in the United States.
President Gerald Ford first signed the EITC into law in 1975, and since then, it has grown in both scope and significance. The program provides tax credits to low- and middle-income earners, sometimes reducing a family’s tax burden to less than zero. As a result, the EITC consistently helps millions of Americans, many of whom are women and children. Its effectiveness in alleviating poverty among vulnerable groups, coupled with its rare bipartisan appeal, make it a crucial antipoverty measure. But the credit’s disproportionate focus on families with children limits its potential to address the poverty epidemic nation-wide. Given the program’s success, the US should expand the EITC for childless workers, thereby using the tax code to bring more people out of poverty, not push them further into it.
The income cap to qualify for the EITC is between $39,131 and $53,267, depending on the household’s filing status and number of dependent children. In 2013, the average EITC payment for a family with children was $3,074. While not the primary recipients of the EITC, childless households can also receive a small rebate — on average, $281 in 2013.
Unlike many welfare programs that catch conservative criticism for promoting dependence, the EITC incentivizes people to work for the credit by lowering the tax burden of low-income, employed families. In contrast to the minimum wage, employers bear none of the costs of the EITC, giving them no reason to lay off workers as benefits expand. Without a hiring disincentive, the program draws more people into the workforce, increasing productivity and reducing the need for other welfare spending — a development that can actually save taxpayers money in the aggregate. Thus, the credit helps to make government welfare spending more efficient without decreasing overall aid to lower-income Americans.
Though the EITC helps a diverse array of Americans, its primary beneficiaries are working women. In fact, single mothers, low-educated mothers, and those families with young children comprise the group most likely to qualify for EITC benefits. When President Bill Clinton expanded the EITC in the 1990s, employment rates for single mothers jumped from under 70 percent to almost 85 percent before the end of the decade. Although welfare reform and minimum wage increases comprised the iconic policies of the 1990s, Clinton’s EITC expansion appeared to have resulted in a substantially bigger gain in employed female heads of household than either of the other two measures.
The additional indirect benefits of the tax credit create a financially secure future for many women. By increasing their incomes, the EITC increases the Social Security benefits that those women receive later in life. Such economic security gives rise to greater independence as seniors and more confidence in current spending. Additionally, studies have shown women who receive the credit are less likely to smoke and drink during pregnancy, contributing to fewer premature births and healthier birth weights. These findings indicate that the benefits of the EITC are more than just economic — they make a lasting difference in families’ lives.
It’s not surprising that even in today’s fractious political climate, leaders in both parties want to maintain and expand the credit. As a government measure with rare bipartisan appeal, the EITC has distinct potential. For conservatives, the EITC aids lower-income people through a small-government mechanism that encourages work and prioritizes families. As a tax credit rather than a government handout, the EITC is market-based and allows people to make their own choices. For liberals, the program is an important part of their antipoverty repertoire, although it receives less attention than the policy du jour: minimum wage laws. Bipartisan agreement also adds security to the program, which means poor families are less likely to have their benefits suddenly stripped away.
Even with these positive attributes, the EITC is an imperfect program. In 2013, the IRS’s improper payment rate associated with the EITC fell between 22 and 26 percent, costing $13.3 to 15.6 billion. Errors like these add costs to an already expensive program. The EITC is also maligned for only providing temporary relief, not a structural solution; since the cash comes all at once, families who need to spend that money immediately may experience only a brief respite from poverty. Additionally, the EITC does little to impact actual wages, which limits the credit’s benefits to a lump-sum payment.
These criticisms are fair, but not debilitating. The IRS is constantly trying to decrease fraud and waste, and as the program continues to stabilize, it will be easier for the agency to ensure recipients are qualified. Although the credit’s benefits may be temporary, the influx of cash it provides can allow for bigger purchases or paying down debt, diverting the rest of a person’s earned income to other necessities. In interviews with 117 families that receive the EITC, many viewed their EITC refund as a vital part of their potential for upward mobility. For instance, two particular interviewees, Pedro and Agustina Rios, try to save a part of each year’s credit so they can eventually buy a house. To them, owning a home would signify their mobility and allow them, in their words, “to be a family.”
For many critics, the EITC’s inability to help childless workers highlights the program’s most significant flaw. While it provides a credit to workers without children, these benefits are miniscule compared to those received by households with children. Often, payments to childless workers don’t even offset their income tax burden. Thus, while the EITC is great for working women, it’s much less effective at helping young, working men or couples without children. As a result, the program taxes some workers deeper into poverty, despite its stated aim to use the tax system to bring people out of it.
Instead of avoiding this criticism, the best way forward is to acknowledge the credit’s legitimacy and consider expansion to childless workers as well. Doing so would bring more people into the workforce and broaden the scope of workers protected from the scourge of poverty. Today, the most politically feasible EITC expansion — supported by both President Obama and Republican Speaker of the House Paul Ryan — would lower the eligibility age from 25 to 21, double the maximum benefit to $1,000, and bring in millions of workers earning up to 125 percent of full-time minimum wage. These changes would impact 14.3 million workers, including 7.9 million people who would enter the labor force thanks to the expansion.
While it has a number of clear benefits, such an EITC expansion would not come without expense. The aforementioned proposal would add $7.8 billion in new costs, augmenting the total price of the childless worker EITC to $9.5 billion. And since the program misses 25 percent of eligible families already, it’s hard to imagine that an expansion would reach all of the people it’s intended to.
Given the importance of defeating poverty and the rarity of successful antipoverty programs, these high costs should not be immediately prohibitive. Every president since Ronald Reagan has expanded the EITC, so there’s no reason to think that it couldn’t be expanded again. But while the note of accord between Ryan’s and Obama’s proposals is an encouraging development, the two, expectedly, disagree on how to fund it — Ryan wants to cut other antipoverty spending, whereas Obama wants to raise taxes. That the two are, as of yet, unable to agree on a mechanism to enact an idea they both support displays that no solution, no matter how attractive, is immune to political gridlock.
While the EITC is undeniably a work in progress, it is essential that Congress and the President devise a policy that allows more workers to reap the rewards of such a powerful program. Expanding the EITC can ultimately aid those without children, giving truth to President Reagan’s claim that the EITC is “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.”