Academic journal article Social Work

What Social Workers Need to Know about the Earned Income Tax Credit

Academic journal article Social Work

What Social Workers Need to Know about the Earned Income Tax Credit

Article excerpt

Over the past several years, U. S. welfare policy has been characterized by an increasing emphasis on employment as the pathway to self-sufficiency. Conservatives, who want to increase work incentives and decrease welfare "dependence," have largely powered this trend. Liberals have responded, in part, by arguing that low-wage work may not increase economic wellbeing if work-related costs increase expenses, or if working families become ineligible for (or have trouble obtaining) in-kind benefits such as food stamps, housing subsidies, and public health insurance. The federal earned income tax credit (EITC) seems to offer something to both conservatives and liberals: The provision of a substantial wage supplement to low-income working families should encourage work (over nonwork) and help families pay for work-related expenses.

But what do we know about the actual effects of EITC? Do families know about and receive the benefits to which they are entitled? Does the program encourage work and help families finance important consumption needs? Are there other effects--positive or negative--for poor and near-poor families? Answering these questions is important because EITC is now the largest antipoverty program in the United States (Hotz & Scholz, 2001). This article provides basic program information and legislative history for EITC; describes participation in the program; summarizes existing evidence regarding the effects of EITC on income and poverty, consumption, household development, and employment; and offers specific policy and social work practice implications.

Description and Legislative History

The federal EITC is a tax credit administered through the Internal Revenue Service (IRS). It is refundable, which means that eligible individuals and families receive payments even if they do not owe federal income taxes. This characteristic is crucial because low-income families who pay little or no federal income tax do not benefit from non-refundable credits (such as the credit for child care expenses). The credit increases the incomes of families who have low wages and limited work hours--families typically considered "working poor." However, the credit also can increase the incomes of families who have earned fairly high wages but who have lost earnings because of injury or illness and who do not have adequate unemployment or disability benefits.

The EITC was created in 1975 to offset the burden of social security and Medicare payroll taxes for low-income working people with children (For details on the history of the EITC, see Hotz & Scholz, 2001, and Liebman, 1998). At that time, the credit equaled 10 percent of earned income, and the maximum value was $400 ($1,239 in 1999 dollars). In 1978, the credit was made permanent, and an advance-payment option, which allows EITC-eligible individuals to receive a portion of their credits through their paychecks, was created. Major expansions of the credit were enacted in 1986, 1990, 1993, and 2001. In 1986, the credit was increased and indexed to inflation. The 1990 legislation gave families with two or more children a slightly larger credit than families with one child. The 1993 legislation increased the maximum credit for families with one child by 9 percent and the maximum credit for families with multiple children by 69 percent. Also, a small credit was created for childless working families. The Economi c Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) increased benefits for married families with children; these increases will be phased in between 2002 and 2008 (Greenstein, 2001). In 1999 federal spending for EITC was about $32 billion, almost double the amount of federal spending for the Temporary Assistance for Needy Families program.

The EITC has a "phase-in range," a "plateau range," and a "phase-out range," with the ranges representing different earnings amounts. …

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