Earned Income Tax Credit - Explained
What is an Earned Income Tax Credit?
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Table of ContentsWhat is an Earned Income Tax Credit?2021 Earned Income Tax CreditHow is the Earned Income Tax Credit Used?Academic Research on the Earned Income Tax Credit
What is an Earned Income Tax Credit?
There earned income tax credit is a tax credit for low-income individuals. The EITC is a refundable credit, meaning that the individual can actually receive back from the federal government more money than they paid into taxes.
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How is the Earned Income Tax Credit Used?
President Ford introduced EITC in 1975. At start it was temporary but in 1978 it became permanent. Its purpose was to compensate low-income families. The EITC us not meant to disincentivize active employment, so the EIC phases in slowly, plateaus, and then phases out slowly. It phases out completely at 21% of income for more than one qualifying child or 16% of income for one qualifying child. Remember, this percentages are within previously mentioned salary ranges for individuals or couples with children. With this structure, it is always preferable to have one more dollar of actual salary or wages than to depend upon the EITC.
Academic Research on the Earned Income Tax Credit
- Labor supply response to the earned income tax credit, Eissa, N., & Liebman, J. B. (1996). The quarterly journal of economics, 111(2), 605-637. The Tax Reform Act of 1986 (TRA86) led to a significant change in the participation of single mothers in the labor force. The effect of TRA86 was observed by relating the changes in the number of single women in the workforce with that of single mothers after TRA86 was passed. It was observed that the participation of single mothers in the workforce elevated by up to 2.8% between 19841986 and 19881990.
- Welfare, the earned income tax credit, and the labor supply of single mothers, Meyer, B. D., & Rosenbaum, D. T. (2001). The quarterly journal of economics, 116(3), 1063-1114. To encourage the participation of single women with children in the labor force, the Earned Income Tax Credit (EITC) was modified and welfare benefits stopped. This occurred between 1984 and 1996. Medical care and training programs were made available for children and poor people in the workforce. This resulted in the enormous increase in the employment and work hours of single mothers.
- Taxes and the labor market participation of married couples: the earned income tax credit, Eissa, N., & Hoynes, H. W. (2004). Journal of Public Economics, 88(9-10), 1931-1958. The Earned Income Tax Credit (EITC) was modified to become a medium for the transfer of cash to single mothers and low-income families with children. This article describes the reaction of married couples to modifications in EITC between 1984 and 1996. Results of the investigation showed an increase of about 0.2% in married men in the labor force while there was a decline in participation among married women of about 1%,
- The earned income tax credit, Hotz, V. J. (2003). In Means-tested transfer programs in the United States (pp. 141-198). University of Chicago Press. Research shows that Earned Income Tax Credit (EITC) is responsible for major growth in the labor industry over the last decade. This paper discusses the various topics and approaches to EITC studied by researchers. Every important EITC-related topic has been studied at least once by scholars except perhaps the economic incidence of the credit.
- The earned income tax credit: Participation, compliance, and antipoverty effectiveness, Scholz, J. K. (1994)... National tax journal, 63-87. The research was carried out by examining various sources of data on Earned Income Tax Credit (EITC) to determine the participation rate and compliance of taxpayers with EITC. The result of the study showed that in 1990 about 80-86% of taxpayers got the credit, which shows that less than 2.1 million taxpayers eligible to receive the credit failed to get it.
- The earned income tax credit and transfer programs: a study of labor market and program participation, Dickert, S., Houser, S., & Scholz, J. K. (1995). Tax policy and the economy, 9, 1-50. This article comments on the existing studies and showcases new evidence on the effect of Earned Income Tax Credit (EITC) on participation in the labor market, transfer programs and hours of work. Studies on the recent estimates of labor supply show that there is a negative impact of EITC on increase in work hours and transfer program participation while EITC has a positive impact on labor market participation.
- The impact of the earned income tax credit on incentives and income distribution, Liebman, J. B. (1998). Tax policy and the economy, 12, 83-119. This article discusses the different features of EITC and shows proof that EITC has increased the number of single mothers in the labor force. It demonstrated EITC as the key to transferring income to low-income families. The article also provides evidence of a reduction in the rate of people evading tax and minimal impact of EITC on labor supply.
- The earned income tax credit and the limitations of tax-based welfare reform, Alstott, A. L. (1994). Harv. L. Rev, 108, 533. The earned income tax credit (EITC) is a cheaper substitute to the traditional welfare programs. Professor Alstott used this article as a medium to assert that EITC case has been simplified in two important ways. The first way describes the lack of emphasis on the behavioral effect of EITC on recipients. The second way explains that EITC experience problems that are not present in traditional welfare cases. The article further demonstrates that improvement in the performance of EITC will require compromise or major reconstruction of the federal tax system.
- In-work benefits in the United States: the earned income tax credit, Scholz, J. K. (1996). The Economic Journal, 106(434), 156-169. Over the past 2 decades Earned Income Tax Credit (EITC) has been a key tool in assisting poor families. EITC encourages people not working to seek employment. Economists have spent years researching on the effect EITC has on labor force participation and change in work hours. This article discusses with evidence the benefits of EITC on the working population.
- A Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty in 2001., Johnson, N. (2001). In this article, Johnson comments on the effect changes made to Earned Income Tax Credits (EITC) has on working families. 10 states modified existing EITCs and enacted new ones between 2000 and 2001. These modifications enabled the transfer of cash to poor working families.
- Effects of the Earned Income Tax Credit on income and welfare, Browning, E. K. (1995). National Tax Journal, 23-43. This article discusses the effect of Earned Income Tax (EITC) on the care and income of the workforce. The investigation was carried out using work supply models to determine the impact on the income and welfare of the recipient population. Results showed that nearly half or receivers reduce their earnings so that their total disposable income reduces.
- The effects of time limits, theEITC, and other policy changes on welfare use, work, and income among female-headed families, Grogger, J. (2003). Review of Economics and statistics, 85(2), 394-408. This paper explores the concept of time limits as a welfare reform. It expands on what is known about this important welfare reform measure by exploiting the predictions from Grogger and Michalopoulos (2003) to estimate the effects of time limits on welfare use, employment, labor supply, earnings, and income among female-headed families. The paper shows that the collective effects of other reforms have important impacts on employment and labor supply. It also analyses the effect of the Earned Income Tax Credit (EITC) in relations to changes in welfare use.
- Behavioral responses to taxes: Lessons from theEITCand labor supply, Eissa, N., & Hoynes, H. W. (2006). Tax policy and the economy, 20, 73-110. Twenty-two million families currently receive a total of $34 billion in benefits from the earned income tax credit (EITC). From this number, it is clearly seen that the EITC is the largest cash-transfer program for lower-income families at the federal level. This paper aims to show the explicit goal of this credit to use the tax system to encourage and support those who choose to work. It goes on to different between the two findings gotten from studies on the labor supply effects of the EITC.
- Teaching the tax code: Earnings responses to an experiment withEITCrecipients, Chetty, R., & Saez, E. (2013). American Economic Journal: Applied Economics, 5(1), 1-31. This study examines a conducted randomized experiment with 43,000 EITC recipients at H&R Block. Tax preparers gave simple, personalized information about the EITC schedule to half of their clients. Results from this experiment shows that the provision of information has no effect whatsoever on earnings in these companies in subsequent years.
- Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of theEITCon Earnings, Chetty, R., Friedman, J. N., & Saez, E. (2013). American Economic Review, 103(7), 2683-2721. This paper estimates the impacts of the Earned Income Tax Credit on labor supply using local variation in knowledge about the EITC schedule.
- Labor supply at the extensive and intensive margins: TheEITC, welfare, and hours worked, Meyer, B. D. (2002). American Economic Review, 92(2), 373-379.
- TheEITC: Expectation, knowledge, use, and economic and social mobility, Smeeding, T. M., Phillips, K. R., & O'Connor, M. (2000). National tax journal, 1187-1209. This paper presents our findings on the knowledge and use of the 1997 Earned Income Tax Credit (EITC) based on a sample of Chicago area households, with children, that filed tax returns in the winter and spring of 1998. Data were also gathered on respondents prior knowledge of the EITC and their ability to make particular expenditures without the help of the EITC. Uses of the EITC are divided into those that improve economic and social mobility, and those that primarily help to satisfy basic human needs.
- Using theEITCto Help Poor Families: New Evidence and a Comparision with the Minimum Wage, Neumark, D., & Wascher, W. (2000). (No. w7599). National bureau of economic research. This paper evaluates the effects of the earned income tax credit (EITC) on poor families. By exploiting state-level variation in EITCs, the authors are able to show that the EITC helps families rise above poverty-level earnings. This occurs by inducing labor market entry in families that initially do not have an adult in the workforce. Finally, results suggest that 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.
- How families view and use theEITC: Advance payment versus lump sum delivery, Romich, J. L., & Weisner, T. (2000). National tax journal, 1245-1265. We analyze ethnographic data on 42 families' perceptions and uses of the EITC, including the decision to use the lump sum or advance payment form. A behavioral life cycle (BLC) model lends a theoretical framework and a description of family financial situations provides context. Parents discuss and exhibit a strong preference for a lump sum combined tax refund and EITC over the credit advance payment option. We argue that the preference aligns with the BLC model and is rational given scarce time, money, and personal energy. We conclude with implications and hypotheses for quantitative investigation of labor supply and well being issues.
- Welfare transitions in the 1990s: The economy, welfare policy, and theEITC, Grogger, J. (2004). Journal of Policy Analysis and Management, 23(4), 671-695. This paper explores the rapid decline in the welfare caseload and its interest to both policymakers and researchers. The author uses data from the Survey of Income and Program Participation spanning the period from 1986 to 1999 to analyze how the economy, welfare reform, the earned income tax credit (EITC), and other factors influence welfare entries and exits, which in turn affect the caseload. This paper aims to show that despite substantial increases in the unemployment rate since 2000, caseloads have remained roughly constant.
- Is theEITCas good as an NIT? Conditional cash transfers and tax incidence, Rothstein, J. (2010). American economic Journal: economic policy, 2(1), 177-208. This paper examines how EITC-induced increases in labor supply may drive wages down. The author simulate the economic incidence of the EITC using different scenarios.
- The earned income tax credit (eitc), Nichols, A., & Rothstein, J. (2015). (No. w21211). National Bureau of Economic Research. This study reviews research on the Earned Income Tax Credit (EITC), with focus on work appearing since the Hotz and Scholz (2003) review. It argues that the EITC may be complementary to the minimum wage, rather than an alternative.