Earned Income Tax Credit Is Effective Anti-poverty Tool

Newswise — The Earned Income Tax Credit (EITC) used for the last 30 years to shore up working families earning below poverty level wages, is an efficient, effective anti-poverty tool that should be expanded, according to two University of Delaware professors of economics.

In their book, Helping Working Families: The Earned Income Tax Credit, Saul Hoffman, chairperson of the Alfred Lerner College of Business & Economics Department of Economics and Laurence Seidman, Chaplin Tyler Professor of Economics, detail the history of EITC and data gathered on the effectiveness of the program since it's inception in 1975. They conclude that it is an anti-poverty program that reduces poverty by rewarding families for work and that it should be enhanced.

"The EITC reduced the poverty rate in 1999 by 1.5 percentage points. About 4 million persons were lifted out of poverty as a result of the cash assistance they received from EITC," Hoffman and Seidman write. In addition, they write that in 2000 for a worker with two children receiving EITC, the effective minimum wage was $7.21, not the statutory $5.15.

They stress that the EITC is not welfare but an "income transfer policy" administered through the IRS and is only given to those who are working. EITC increases as family income rises to a certain level, then it begins to diminish and ends when the family is earning a living wage.

Expanding EITC should appeal to liberals because it works and conservatives because it's not a "giveaway" program, Hoffman and Seidman write.

Under the current system, a person with two children earning less than $10,020 per year receives a maximum credit of 40 percent until his or her income reaches $10,020, after which the subsidy is reduced 21.06 percent until phase-out at $32,121.

Hoffman and Seidman have recommendations for making EITC more effective: Expand the phase-in and phase-out portions so that families' incomes would be supplemented at a higher rate and for a longer period of time. That same family of four would begin phase-out at $12,020. Subsidies would end at $43,178. Institute a more generous benefit schedule for married couples.

Increase the benefit for families with three or more children.

These changes would "reduce negative work incentives, reduce the efficiency cost of the EITC, improve fairness and economic opportunity, reduce the marriage penalty and reduce poverty among larger working families," they write.

Helping Working Families is published by W.E. Upjohn Institute for Employment Research.