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Growth of the Earned Income Tax Credit

2 min readBy: J. Scott Moody, Arthur P. Hall, Ph.D.

Download Special Report No. 53

Executive Summary

The Earned Income TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Credit (EITC) became a part of the federal tax code with the Tax Reduction Act of 1975. It had two major objectives: (1) to provide tax relief to low-income workers with children by offsetting the burden of payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es used to finance Social Security, Medicare, and Unemployment Insurance; and (2) to provide an incentive for people to seek gainful employment instead of welfare.

Since its enactment in 1975, the EITC has been greatly expanded. In fiscal year 1976 the total value of the EITC amounted to $1.1 billion. By fiscal year 2000, the value is expected to exceed $30 billion. The rapid growth of the EITC program has resulted from successive legislative expansions of both the size of the credit and the size of the population eligible to receive the credit.

The history of the EITC comprises four distinct legislative periods. The growth in periods two, three, and four are the result of the Tax Reform Act of 1986 (ERA 86), the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), and OI3RA 93. During the time-span from 1976 to 1986 (period one), the total value of the EITC increased at an average 4.8 percent a year (-1 .4 percent in constant 1996 dollars). During the time-span between 1986 to 1996 -the period of successive legislative expansion – the total value of the EITC increased at an average rate of 22.1 percent a year (19 .6 percent in constant 1996 dollars).