May 26, 2020
The Earned Income Tax Credit (EITC) is an annual means-tested money benefit available to eligible tax units with earned income and administered through the tax system. In 2019, about 25 million tax units received a total of $63 billion in benefits from the EITC. The vast majority of these benefits went to below median income households with children.
The amount of the credit a tax unit is eligible to receive increases along with labor earnings up to a maximum that varies by filing status and the presence and number of children in the tax unit. For tax year 2020, a single filer with no children is ineligible if they have earnings or adjusted gross income (AGI) above $15,820. A married couple filing jointly with three children is ineligible if they have earnings or AGI above $56,844. Nearly half of the tax units that receive the EITC file as Head of Households (typically unmarried mothers with one or more children), 22 percent are Married Filing Jointly, and 29 percent are single filers.
The EITC increases the annual income of the tax unit that received it—on average, by nearly $2,500 last year before counting any filing costs—and reduces income inequality and poverty. It has received more support from Republican policy makers than practically all of the other major programs that make up the US welfare state. Yet, conservative and libertarian think tanks have criticized the EITC on a number of grounds. The Heritage Foundation has argued that it penalizes marriage and is often claimed fraudulently. The Cato Institute has called for eliminating it altogether and instead cutting the payroll tax.
Over the last few years, these critics have been joined by new voices on the left. A recent example is The Myths of the Earned Income Tax Credit, a provocative report by Matt Bruenig of the People’s Policy Project, and an accompanying piece by Bruenig, It’s Time for Democrats to Abandon the Earned Income Tax Credit, in the socialist magazine Jacobin.
Bruenig argues that the conventional approach to measuring how much the EITC reduces income poverty fails to properly account for non-participation by eligible tax units, filing costs incurred by many units who claim it, and the fact that it is counted as received in the calendar year before it is actually received. He also argues that the EITC has not increased employment in the past and that further expansion would not do so in the future. In his conclusion, he states that “the best way to expand the US welfare state going forward is not to enact more EITC-like measures, but to instead use more efficient and more effective universal programs. In the case of the EITC, that means replacing the EITC and the Child Tax Credit with a universal monthly child benefit administered by the Social Security Administration.”
Max B. Sawicky, an economist and writer who has previously worked at the Economic Policy Institute and the Government Accountability Office, offers a defense of the EITC from the left. I’ll be weighing in with my thoughts in the next few days, and we hope others will join the discussion.