The very real success of the Earned Income Tax Credit

Today Representative Paul Ryan (R-WI) released a discussion draft of a plan to fight poverty and increase mobility and opportunity. The plan touches on a variety of public policy topics from funding of anti-poverty programs to higher-education accreditation. Yet one proposal from Rep. Ryan deserves particular attention.

At an event this morning announcing the plan at the American Enterprise Institute, Ryan stated that the Earned Income Tax Credit has “really shown results” and called for an expansion of the program for childless earners. According to a variety of research, the Chairman of the House Budget Committee is correct. The Earned Income Tax Credit is a program that has boosted millions of workers out of poverty and has demonstrable positive long-term effects.

To start with the basics, the EITC is a tax credit that directly boosts the earnings of low-wage workers provided they are working. The program was designed to boost the labor supply of these workers and ensure a certain level of earnings for anyone who worked. The tax credit is refundable, meaning that if the credit is larger than the amount of federal tax these workers have  paid then they receive the difference in cash.

On the metric of reducing poverty, the EITC has been quite the success. According to calculations from the Center on Budget and Policy Priorities, this tax credit pulled 6.5 million people out of poverty in 2012. And about 3.3 million of those people were children.

By boosting the incomes of parents, the EITC also helps boost the long-term prospects of children and our economy. Economists Hilary Hoynes, David Simon, and Douglas Miller of the University of California, Davis find that increases in the EITC are associated with improved health outcomes for infants. Specifically, they find that an increase in the tax credit are correlated with decreases in the likelihood a child has a low birth weight, which has long-lasting health effects.

Similarly, increases in the EITC help improve educational outcomes for children. Economists Gordon Dahl of the University of California-San Diego and Lance Lochner of the University of Western Ontario look at increases in the tax credit and test scores on standardized tests. Using statistical techniques that allow them to find causality, Dahl and Lochner find that an increase in the tax credit boosts combined reading and math test scores.

Of course, the EITC isn’t a perfect program. Research shows that some of the value of the credit is captured by employers because they can pay these workers less because the workers in turn can afford lower wages. On this front, a higher minimum wage can help ensure more of the value goes to the workers.

A wide variety of research shows that increases in the Earned Income Tax Credit—simply increasing the amount of money workers get—has real benefits in the short and long run.

July 24, 2014


Individual Taxation

Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch