LegiStorm

Summary:

The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers Specialist in Public Finance earning relatively low wages. The EITC, enacted more than 40 years ago, has evolved from a mcrandallhollick@crs.loc.g relatively modest tax benefit to a significant antipoverty program. This report reviews economic ov research on the EITC. Understanding the economic impact of the credit, as well as its limitations Joseph S. Hughes and potential drawbacks, may inform future legislative discussions of the EITC and other Research Assistant refundable tax credits. jhughes@crs.loc.gov When initially enacted in the 1970s, there were two major purposes of the EITC. First, the credit For a copy of the full report, was meant to encourage the nonworking poor with children to enter the workforce. Second, the please call 7-5700 or visit credit was intended to help reduce the tax burdens of working poor families with children. Some www.crs.gov. policymakers at the time worried that taxes—especially payroll taxes—would reduce poor families’ take-home pay to such an extent that they would need to rely on cash welfare. In the 1990s, the purpose of the credit was expanded to include poverty reduction, with a focus on encouraging welfare recipients—generally unmarried mothers— to work. At the time, the EITC was seen as a way to ensure that a full-time worker with children would not be in poverty. As the credit has expanded and changed over time, researchers have evaluated various aspects of the credit, including the following:  Decisions About Working: The EITC has encouraged single mothers to enter the workforce, but generally has had little to no impact on the number of hours they work. For example, one study found that 34% of the increase in employment among single mothers between 1993 and 1999 was due to legislative expansions of the EITC.  Poverty: The EITC has had a significant impact on reducing poverty among recipients with children, but little impact among childless individuals. For example, CRS analysis indicates that the EITC reduces the proportion of unmarried childless workers in poverty from 19.9% to 19.6% (a 1.5% reduction). In comparison, the EITC reduces the proportion of unmarried households with three children in poverty from 40.5% to 32.3% (a 20.2% reduction).  Health and Education Outcomes: Although the EITC was not designed as a health or education benefit, current research suggests that it may improve the health and educational achievement of low-income populations.  Fairness: The EITC has increased inequity in the tax code between those with and without children. The unequal benefit the credit provides to families with children in comparison to those without is largely due to the different objectives of the credit for these two populations. For workers with children who work full time at a minimum wage job, the EITC was intended to ensure that the family would not be in poverty. In contrast, the smaller childless EITC was designed to help childless workers offset a gas tax increase, and not intended to lift them out of poverty.  Complex Rules: The EITC’s complex rules and formulas may make it difficult for taxpayers to comply with and difficult for the Internal Revenue Service (IRS) to administer. Studies indicate that EITC errors (whether intentional or unintentional) result in a relatively high proportion of EITC payments being issued incorrectly. The IRS estimates that between $14.9 billion and $17.6 billion in EITC payments (i.e., between 21.9% and 25.8% of payments) were issued improperly in FY2017. The majority of the dollar amount of these errors is due to taxpayers incorrectly claiming children for the credit. In addition, the IRS may have difficulty ensuring that tax filers are in compliance with all the parameters of the EITC.