4 Benefits of the Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a federal tax credit which is designed to transfer money to low-income and middle-income working individuals and families. To learn more about what the EITC is and if you qualify, then click here. The EITC is one of my favorite ways of eliminating poverty, but it also comes with many other benefits! Here are four benefits of the Earned Income Tax Credit:

1. The Earned Income Tax Credit encourages individuals to work.

In order to qualify for the EITC, unlike other welfare programs, an individual must have worked at a job. More importantly, the EITC amount that an individual receives also increases the more that the individual works (up to a certain limit). These two facts cause many people to both join the labor force as well as work harder and longer hours at their job. These benefits go directly to the people that need it most: the low-income working class. As can be seen from the figure below1, after the EITC was expanded in the early 1990s, the percent of single mothers who joined the workforce increased drastically. This was due in large part to the incentive of a large tax refund from the EITC, which could help offset the costs of finding childcare for their children and allow them to join the workforce. The increase in labor participation by these single mothers also lead to an increase in long-term earnings growth when compared to similar women 2.

2.The Earned Income Tax Credit reduces poverty.

By encouraging people to work and transferring money to low-income working individuals and families, the EITC is estimated to have lifted a whopping 9.4 million people out of poverty and made 22.2 million people less poor in 2013 3. As you can see from the figure below, out of the 9.4 million people lifted out of poverty, 5 million of them were children. This goes to show that the EITC is specifically beneficial for the most vulnerable among us. The long-term benefits of bringing people out of poverty are enormous for the health and future earning potential of those who benefit as well as society as a whole. This causes a positive cycle of prosperity for both the working class as well as the children of the working class.

3.The Earned Income Tax Credit grows the economy.

By encouraging more people to work, the EITC encourages more people to be productive members of the economy. The individuals affected by the EITC also inject a much higher percent of their income back into the economy4. By transferring much-needed funds to the poor, we are increasing the demand for goods and services in the economy as a whole. This injection of funds back into the economy means that even more people are put back to work. This positive cycle causes even larger expansions in the economy during times of recession (when more people receive the EITC), which benefits not just those in the lower socioeconomic class, but everyone.

4.The Earned Income Tax Credit helps lift children out of long term poverty.

By giving poor families and single mothers an extra income, the EITC has allowed millions of individuals to be able to purchase necessary groceries, child care, health care, and education expenditures, which have drastically helped children. Studies show that the EITC has lead to children with higher academic outcomes and a higher likelihood of high school graduation and college enrollment5. Education is one of the best ways for many of these individuals to escape their inherited poverty. Research also shows that increasing the income of a poor family by $3,000 a year leads to children with an average earnings increase of 17% throughout their adult lives6. The EITC benefits people in both the short and long term. Most importantly, it helps break down the obstacles in generational poverty.

Sources:

1.http://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens#_ftn13
2.http://ftp.iza.org/dp4146.pdf
3.http://www.cbpp.org/research/federal-tax/state-fact-sheets-the-earned-income-and-child-tax-credits
4.http://www.econ2.jhu.edu/people/ccarroll/papers/cstwMPC/
5.https://msu.edu/~maxfiel7/20131114%20Maxfield%20EITC%20Child%20Education.pdf
6.http://www.ipr.northwestern.edu/events/other-events/docs/conf08-attainment/papers/duncan.pdf

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