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Sunday, October 23, 2011

The Importance of the EITC for Working Families

I didn't know that prior to the crisis, i.e. in the period from 1989 to 2006, "Approximately half of all taxpayers with children used the Earned Income Tax Credit (EITC) at least once during this 18-year period." And the people who use the program pay far more in taxes than the EITC uses:

New Research Highlights Importance of EITC for Working Families, by Indivar Dutta-Gupta, CBPP: New research shows that a larger share of families than we might think turn to a key federal work support — the Earned Income Tax Credit (EITC) — but that most of them receive the credit for only a year or two at a time.

Taken together with other research, the new study suggests that while the EITC helps some workers who are persistently paid low wages, for most families who use it, the credit provides effective but temporary help during hard times. ...

The study, from Tim Dowd of the Joint Committee on Taxation and John Horowitz of Ball State University, examined EITC use from 1989 to 2006 and found:

  • Approximately half of all taxpayers with children used the EITC at least once during this 18-year period.
  • A large majority (61 percent) of those using the EITC did so for only one or two years at a time — only 20 percent used it for more than five straight years (see graph).

The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period, after subtracting the EITC and any other refunds.

Dowd and Horowitz’s new study also found that EITC use is highest when children are youngest — which is also when parents’ wages are lowest.  (Working parents’ wages rise, on average, as their children grow up.)  This finding is particularly important given the importance of income for young children’s learning and the evidence that poverty in early childhood may reduce children’s earnings as adults.

RedState explains compassionate conservatism:

we must tell the truth about the EITC...  They are not tax credits; they are welfare payments – and must be eliminated

What is their solution?:

Oh, but you might ask, what would you do for low-income families?  Well, we can’t offer more tax cuts to those who don’t pay taxes...  But we could make this promise: by fostering a true free market society – one that is devoid of over-taxation, regulation, litigation, and yes – subsidization – they would have a realistic opportunity to receive a decent paycheck, instead of a handout.

And what if free markets don't do the job? Republicans who want to scale back the EITC should heed the words of their hero:

President Ronald Reagan ... called it "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress."

When you believe, falsely, that 47% of the people are essentially leeches living off the other 53% (instead of viewing them as the people who do much of the hard work in society to create the wealth the upper tiers enjoy but get little in return -- wages have lagged behind productivity), this kind of warped view is the outcome. If the "Approximately half of all taxpayers with children used the EITC" in the last 18 years were to stop working -- if they actually became the deadbeats the right portrays them to be -- the severe economic problems that we'd have would give us a much better sense of their value.

    Posted by on Sunday, October 23, 2011 at 11:07 AM in Economics, Social Insurance | Permalink  Comments (17)


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