The Earned Income Tax Credit almost pays for itself

DEMOCRATS AND Republicans can sometimes agree that splashing water on things might make them wet, but not on much else. How remarkable, then, that the Earned Income Tax Credit (EITC), which tops up the earnings of low earners, is beloved by politicians of all stripes. EITC is one of the most effective government programmes. Analysis from the Centre on Budget and Policy Priorities, a think-tank, finds that it boosts the income of around 28m Americans every year, lifting 9m of them above the poverty line. A new working paper finds the programme might be even better than was previously realised, because it costs so little to administer.*

The study, written by Jacob Bastian, a post-doctoral researcher at the University of Chicago, and Maggie Jones of the Census Bureau, points to two reasons why the EITCcosts taxpayers less than is generally understood. First, the EITC, unlike many other welfare programmes, is designed to encourage more people to work, since only the employed can receive benefits. This results in a bigger pool of people paying income tax. Second, the EITC raises incomes of the poor, which means fewer are dependent on other forms of welfare. Mr Bastian and Ms Jones find that once you take these two factors into account, every dollar the government notionally spends on the EITCcosts taxpayers just 13 cents on net.

Although the EITCis generally well-regarded, it does have some kinks. A single person without children can only receive benefits if they earn less than $15,270 a year, or roughly the federal minimum wage. They also can only receive up to $519. By contrast a parent with one child can receive up to $3,461. A single parent with one child can claim benefits if they earn less than $40,320, while a couple with one child can claim benefits if they earn less than a combined $46,010.

This means the programme has a bigger impact on the behaviour of some than on others. Research has found single mothers are the most likely to join the workforce because of the EITC. The tax credit has little effect on the employment rates of fathers since they are more likely to have jobs anyway. The EITC also has some downsides. Married women who are not their families’ chief breadwinners are actually discouraged from working if their households are near the eligibility threshold.

The fact that the EITC makes people richer, and hence less likely to be eligible for other kinds of welfare programmes, might mean some of its reported benefits have been overstated. But past research has found that beyond its impact on household finances, the EITC has also been shown to lower crime rates for women, and to improve health and education. Mr Bastian reckons the EITC might have further positive effects: single mothers who are nudged into work, might serve as better role models for their kids, for instance.

The EITC does have one glaring shortcoming: it does little to help the childless. America’s labour-force participation rate is below that of many other rich countries, including Britain, Canada and Germany. Closing this gap would be a boon for the economy. But convincing a discouraged worker to start looking for jobs again will probably take more than $519 a person.

*“Do EITC expansions pay for themselves? Effects on tax revenue and public-assistance spending,” by Jacob E. Bastian and Maggie R. Jones.

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