This year marks the 40th anniversary of the largest economic mobility program in the country--the Earned Income Tax Credit (EITC). Signed into law by President Gerald Ford, the EITC has been expanded by every single president since, by Republicans and Democrats alike. Today, new research is improving our understanding of how families actually use the program, inspiring new reform proposals to make the EITC work even better for working families.
At its core, the EITC is a program for the working poor and near-poor. You have to have income to receive any benefit. The more you work, the more benefit you get (up to a point). Your benefit comes in the form of a bigger refund when you file your taxes.
This benefit can be hugely meaningful for low-income families. Consider a two-parent family with two children. One parent works full time at the federal minimum wage, and another pulls in 20 hours a week at the same wage. Their combined income for the year is about $22,000, placing their family below the federal poverty level. But at tax time, that family will qualify for an EITC of more than $5,400. Not only does their EITC lift them above the poverty level, it represents nearly a quarter of their entire annual income. Nationwide, EITC lifts millions of working families out of poverty every year, including more than three million children.
Forty years into the program, we’re learning that the EITC does not only boost incomes to help families get by—it’s also empowering families to save and invest to get ahead. In over a hundred in-depth interviews with EITC recipients and their families, Professor Kathryn Edin and her co-authors of the new book, It’s Not Like I’m Poor, explore how families interact with the program. In short, the EITC is revealed to be more than an income-boosting program. It is a savings program, an investment program, and, fundamentally, an economic mobility program.
Families use the EITC to pay off old debts, repair their credit, put away savings, and make investments in assets like education, vehicles for work, and even first home down payments. Because the EITC is provided in a lump sum payment once a year, it encourages this type of long-term decision-making. This isn’t a case of government forcing behavior changes on the poor. Edin and her authors have found that families prefer receiving lump sum payments rather than a marginal boost to their monthly paychecks.
The EITC isn’t perfect. Paid tax preparers prey on low-income families, siphoning off billions of dollars of EITC-boosted refunds in return for needlessly expensive tax services. While the federal Volunteer Income Tax Assistance (VITA) program provides millions of families a free alternative, the demand for the program far outstrips supply. The EITC could also do more to help unbanked families join the formal financial system, and it could do more to help all eligible workers save and invest for the future.
Even in divided government, this type of reform has a real chance. This Friday marks EITC Awareness Day, a day when advocates, policymakers, and service providers come together to shine a light on the EITC and its impact on families and communities throughout the country. On Capitol Hill, Prof. Edin will join Sen. Sherrod BrownSherrod Campbell BrownSenate Democrats seeking information from SPACs, questioning 'misaligned incentives' Senate advances Biden consumer bureau pick after panel logjam Centrist state lawmaker enters Ohio GOP Senate primary MORE (D-Ohio) in speaking to bipartisan audience about the EITC and reforms for the future. Brown has long proposed new expansions to the program, and Ways and Means Chairman Paul RyanPaul Davis RyanPaul Ryan researched narcissistic personality disorder after Trump win: book Paul Ryan says it's 'really clear' Biden won election: 'It was not rigged. It was not stolen' Democrats fret over Trump-district retirements ahead of midterms MORE (R-Wis.) has identified the EITC as a topic of general agreement.
Forty years into the EITC, we know much more about how it works, and how it could work even better. Let’s hope Congress will find a way to make the next forty years of the EITC even more impactful for working families.
Levin is associate director of the Corporation for Enterprise Development.