The Earned Income Tax Credit and the Child Tax Credit work well, and have for decades, a new Economic Policy Institute report finds. The Earned Income Tax Credit and the Child Tax Credit increase after-tax income of low- and moderate-income taxpayers, reduce poverty, and reduce income inequality. In The Earned Income Tax Credit and the Child Tax Credit: History, Purpose, Goals, and Effectiveness, EPI Senior Economist and Director of Tax and Budget Policy Thomas Hungerford and EPI Federal Budget Policy Analyst Rebecca Thiess review the tax credits’ effectiveness and find that Earned Income Tax Credit and the Child Tax Credit help reduce poverty significantly, lifting nearly six million out of poverty in 2011. The authors find that the Earned Income Tax Credit and the Child Tax Credit are the most progressive tax expenditures in the tax code.
“With recent expansions of the earned income tax credit and the child tax credit set to phase out in 2017, now is the time to emphasize how effective these credits are and have been for decades,” said Hungerford. “Eliminating these credits would be disastrous for the millions of families who need them.”
The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are two tax provisions designed to increase the after-tax income of low- and moderate-income individuals and families, especially those with children. The EITC is work-oriented—the amount of the credit is based on earnings, which include wages and salaries as well as self-employment income. It does not include income that is not connected with employment (including interest, dividends, capital gains, and income from social welfare programs). The amount of the credit first increases as earnings increase, reaches a plateau, and then falls as earnings increase. The child tax is not targeted to just lower-income taxpayers. A married couple with two children can receive the child tax credit with income of up to $150,000 (an income level that puts them in the top 10 percent of the income distribution). The limits on the additional child tax credit cap the refundable portion of the credit for the lowest-income taxpayers, but usually not for middle-income taxpayers. In addition, the CTC is a fixed per-child amount.
Since the credits are designed to increase after-tax income of low- and moderate-income workers, they can be judged by their effect on poverty, tax progressivity, and after-tax income inequality. Adding the amount of the EITC and CTC to family income reduced the number of people in poverty by almost six million in 2011, with children accounting for over half of the individuals moved above the poverty threshold. However, the effect of the two tax credits on poverty is not uniform, varying by family size. Taxpayers with children experience a reduction in poverty rates due to the EITC and CTC. For some of these taxpayers, the two credits together more than offset income and payroll taxes to raise living standards.
The research indicates that the EITC increases labor force participation with little or no effect on hours worked.
“The earned income tax credit and the child tax credit are tried and true programs that help millions of families and help the economy and any proposals to change them should focus on making them stronger, not gutting them,” said Hungerford.