Helping Working Families: The Earned Income Tax Credit

Helping Working Families: The Earned Income Tax Credit

Helping Working Families: The Earned Income Tax Credit

Helping Working Families: The Earned Income Tax Credit

Synopsis

Hoffman and Seidman offer an overview of the Earned Income Tax Credit as it stands early in the twenty-first century. They describe, analyze, evaluate, summerize, and critique the EITC and make policy recommendations for changes based on their analysis.

Excerpt

When we first wrote about the Earned Income Tax Credit (EITC) in 1990, it was still a little-known and lightly funded government program that played a relatively minor role in the government's broad set of antipoverty policies. the eitc, as it is usually known, had been around since 1975, when it was introduced as a small "work bonus” for very low income working families. It had barely been revised or expanded in the intervening years. Despite the cutbacks of the Reagan years, welfare thoroughly dominated the antipoverty policy approach. Expenditures on Aid to Families with Dependent Children (AFDC) and Food Stamps, the two most well-known transfer programs, were about $20 billion each and Medicaid, the medical assistance program for the poor, added another $70 billion. in contrast, total payments under the eitc were about $7.5 billion and the average recipient family received just $601. It was still several years before candidate Bill Clinton would promise "to end welfare as we know it” and 6 years before welfare reform, in a form that truly was the end of welfare as we had known it, would actually come to pass.

Yet, even then, the eitc was clearly something different. Unique among income-transfer programs for the poor, the eitc conditioned its benefits on earnings. Families without earnings received nothing, reflecting its linkage to work. Benefits actually increased with family earnings through a portion of the income distribution, before eventually phasing out at higher incomes. This was just the opposite of the traditional welfare programs like afdc and Food Stamps, which provided maximum benefits to families without earnings and then reduced benefits at a very high rate as family earnings increased. Married couples as well as single parents were eligible for eitc under identical rules—another difference from afdc, which provided far more generous treatment of single-parent families than married couples. in fact, the eitc wasn't technically a welfare program. It was a tax credit, administered by the Internal Revenue Service (IRS), not through the welfare system. and nearly unique among tax credits, it was refundable, which meant that poor working families could fully realize its benefits, even if they owed little or no taxes.

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