Eliminating Earned Income Tax Credit Would Bolster Work Incentives

August 6, 2013

Economic Growth and Jobs Receive Boost

Washington, D.C., August 6, 2013—The U.S. Senate Finance Committee is currently considering changes to the Earned Income Tax Credit (EITC), along with many other tax expenditures, as part of a comprehensive tax reform plan. A new study by the nonpartisan Tax Foundation highlights the flaws of the EITC, which is meant to encourage employment for low-income individuals, showing that the elimination of the credit would actually increase employment and economic growth.

Under a conventional static revenue estimate which assumes an unchanging economy, it appears that eliminating the EITC would raise federal revenues by $56 billion. When the numbers are analyzed using a dynamic model – which assumes that tax rates impact investment, employment, and economic activity – the Tax Foundation finds that the revenue increase would actually be even higher at $64 billion, GDP would be $34 billion higher, and employment would rise by 274,000 full-time workers.

If the static revenue gains from an elimination of the EITC were traded for a 5.7% across-the-board rate cut, GDP would receive a boost of $125 billion, federal revenues would see an increase of $29 billion, and employment would increase by 783,000 full-time workers. Additionally, hourly wages would see a slight increase.

“This study is not a condemnation of the EITC, but it’s important to understand the imbalance of its positive and negative effects” says Tax Foundation Fellow Michael Schuyler, Ph.D. “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. Nonetheless, the phase-out discourages workers from accepting more hours worked by reducing the amount of the additional pay they would otherwise receive. As a result, the Tax Foundation’s model finds that the negative impact of the phase-out depresses the labor supply by more than the phase-in bolsters the labor supply.

“The phase-in of the EITC powerfully encourages people with very low incomes to work. The phase-out of the EITC strongly discourages the larger number of people with somewhat higher incomes from working more,” added Stephen J. Entin, Senior Fellow at the Tax Foundation.

Tax Foundation Fiscal Fact No. 385, “Case Study #7: The Earned Income Tax Credit” by Michael Schuyler, Ph.D. and Stephen Entin, is available online. This study is the seventh in a series of 11 case studies in the Tax Foundation’s Economics of the Blank Slate series.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Borean, the Tax Foundation’s Communications Associate, at 202-464-5120 or borean@taxfoundation.org.

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