Friday, March 5, 2010

The Earned Income Tax Credit

One of Obama’s Economic Stimulus Packages is expanding the qualified families of the Earned Income Tax Credit. For the tax year 2009 and 2010, there are more low-income families received EITC:

Among a number of policies aiming at helping the poor, EITC is considered to be one of the most effective measures. During the past 35 years, there were 24 states which have enacted the federal program of EITC. More and more states are considering establishing the state and local EITC which piggybacks on the federal program.

Why the EITC receives so many credits and presents such popularity among all the other antipoverty policies? A lot of evidences prove the EITC plays a crucial role in reducing the poverty especially children, stimulating people’s incentive to work, and boosting the local economies.

Raising children in the U.S. is very expensive in the United States. In 2003 the average household in the lowest income group spent 28% of their before-tax annual income on a child, while those in the highest income group spent 14%. Many children in working families live in poverty—about 8.6 million children in 2006. EITC substantially reduced the burden of raising children. By cutting the tax from EITC in 2003, about 4.4 million people in low-income families were shifted out of poverty. The Council of Economic Advisers (1998) showed that more than one-half of the decline in child poverty between 1993 and 1997 could be explained by changes in taxes, and most important was the EITC. The total poverty gap—the aggregate difference between poor families’ resources and the poverty threshold—for families with children would have been 20 percent higher in 1999 without the EITC (Ziliak2004).

Compared with other antipoverty polices, EITC has done a much better job in stimulating people’s incentive to work. Minimum wage is often criticized as a factor causing the increase of the unemployment by disturbing the demand and supply of the labor market. However, as for EITC, research strongly confirms that it has played a critical role in bringing more single mothers into the workforce. For those already in the workforce, the effects on labor supply appear much smaller and mixed. For the range of policy changes typical of recent history in the U.S., the EITC is more beneficial for poor families than is the minimum wage (David Neumark, William Wascher).

The last benefit of the EITC is boosting the local economies as a federal investment in local and regional economics around the country. Compared with other traditional “urban” federal programs aiming at community development, EITC provides more concentrated cash infusion to local economies. For example, in 2004 Community Development Block Grant and HOME programs (which provide cities and states with flexible funds for affordable housing and community economic development) awarded roughly $3.1 billion to nearly 1,000 municipal governments nationwide. That same year, residents of those same cities and towns received over $20 billion from the EITC.

Despite its huge success on reducing poverty and stimulating the economy, there is still a lot of work to do to increase the effectiveness and efficiency of the program. Many researches call for the expansion of the EITC dimension among particular low income families. Greater efforts can be made to help the taxpayer to avoid the complexity of the EITC and so on. A recent proposal by Obama administration to eliminate the Advance Earned Income Tax Credit (Knows as AEITC, which is different from the EITC) indicates the underlying problems and challenges of this program.

1 comment:

  1. Lu, very informative post. I like to add one comment --

    AEITC is a scheme for people eligible for EITC to get their credits earlier (by month) instead of waiting for the credit after they file tax returns.