Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- The Tax Policy Blog
- Reactions to our Earned Income Tax Credit Study
Reactions to our Earned Income Tax Credit Study
The Earned Income Tax Credit (EITC) is a controversial program, and emotions sometimes run high when it’s up for discussion. And, like most of the major tax provisions in the federal code, it is very much up for discussion, as tax reformers in both houses of Congress, and the staff of the Senate Finance Committee in particular, sift through the arguments for retaining various provisions as part of the “blank slate” approach to reform.
Today we released an analysis of the economic effects of repealing the EITC, garnering a nice write-up over at The Hill, and some interesting reaction on Twitter and elsewhere, with some readers wondering if we had sufficiently addressed the effects a repeal would have on the welfare of the working poor, the group that the credit was created to help.
We believe that, on net, the EITC probably reduces total hours worked as people who are already in the labor force react adversely to the phase-out. However, several studies have found that the EITC encourages some people to enter the work force who otherwise would not at a rate greater than this model assumes. On the other hand, a second effect outside the model cuts in the other direction. A long series of studies by government watchdog agencies have found a considerable amount of EITC fraud, with over 20 percent of payments being improper.
Schuyler went on to explain:
This study is not a condemnation of the EITC, but it’s important to understand the imbalance of its positive and negative effects. What was once introduced as a subsidy for the working poor with children has grown to include disincentives for many middle class workers.
The credit does help workers with very low incomes. For workers with higher earnings, the credit continues to raise incomes until it is fully phased out. The phase-out, however, does discourage workers from accepting more hours worked by reducing the amount of additional pay they would otherwise receive. As a result, our research suggests that the negative impact of the phase-out depresses the labor supply by more than the phase-in bolsters it.
It is possible that tax reformers in Congress could alter the Earned Income Tax Credit in any number of ways rather than eliminating it, but in the spirit of our Economics of the Blank Slate analysis series, we modeled a scenario in which it was dropped from the code entirely. It's important to rememeber, though, that our analysis also found that pairing an EITC repeal with an across-the-board tax cut would increase GDP by $125 billion per year and add 783,000 full-time jobs. Those additional opportunities would also be good for low-income workers.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.