Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds
For Children, Research Indicates that Work, Income, and Health Benefits Extend Into Adulthood
Revised March 5, 2014
The Earned Income Tax Credit (EITC), which went to 27.9 million low- and moderate-income working families in 2011, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit. The research indicates that children of EITC recipients, for instance, do better in school, are likelier to attend college, and earn more as adults. The Child Tax Credit (CTC), a related credit that’s designed to help offset the cost of child-rearing, also plays a major role in helping low-income working families.
Specifically, the EITC significantly increases the work effort of its recipients. The EITC expansions of the 1990s have contributed as much to the increases in work among single mothers and female heads of households that have occurred since that time as the welfare reforms enacted in that period, extensive research has found. Women who benefited from those EITC expansions also experienced higher wage growth in subsequent years than did otherwise similarly-situated women. And, by boosting the employment and earnings of working-age women, the EITC boosts the size of the Social Security retirement benefits they ultimately will receive. In addition, the research shows that by boosting the employment of single mothers, the EITC reduces the number of female-headed households receiving cash welfare assistance.
The EITC may also improve the health of infants, research indicates. Infants born to mothers who could receive the largest EITC increases in the 1990s had the greatest improvements in such birth indicators as low-weight births and premature births.
Moreover, income-boosting measures such as the EITC improve educational outcomes for young children in low-income households, recent research finds. Each $1,000 increase (in 2001 dollars) in annual income for two to five years improves the school performance of children on a variety of measures, including test scores. Similarly, a credit that’s worth about $3,000 (in 2005 dollars) during a child’s early years may boost his or her achievement by the equivalent of about two extra months of schooling.
The EITC’s success in boosting work effort and earnings extends into the next generation, the new research indicates. The children of families with more income from refundable tax credits will do better in school, and they are likelier to attend college and also likely to earn more as adults. Those same children are also likelier to avoid the early onset of disabilities and other illnesses associated with child poverty, further enhancing their ability to earn more as adults.
Finally, the EITC reduces poverty and provides a short-term safety net for most of its recipients. To reduce poverty, it encourages work and supplements the wages of poor or near-poor workers — which is particularly important at a time when large numbers of Americans work for low wages, the purchasing power of the minimum wage is substantially lower than it was in the 1960s and 1970s, and job growth thus far in the economic recovery has been disproportionately concentrated in low-wage occupations. Most EITC recipients claim the credit for short periods (a year or two) and mostly to offset the temporary costs of a child’s birth or a spouse’s loss of income. Most EITC recipients pay more in federal taxes over the long run than they receive in the EITC benefits they tend to claim for short periods.
How the EITC and CTC Work
The EITC, a federal tax credit for low- and moderate-income working families and individuals, is designed to encourage and reward work, offset federal payroll and income taxes, and raise living standards. To claim the credit, a taxpayer must have earnings from a job. The EITC is “refundable,” meaning that if it exceeds a low-wage worker’s federal income tax liability, the Internal Revenue Service refunds the balance to the taxpayer.
The EITC’s primary recipients are working parents with children, though a small EITC is available to working adults without dependent children. The credit rises with earned income until it reaches a maximum (which varies by the number of qualified children) and then phases out as income rises further. For 2013, the phase-outs begin at about $17,550 for single filers and about $22,900 for married filers, and the average size of the credit is expected to be $2,828 for a family with children and $280 for a family without children.
The CTC, which provides taxpayers up to $1,000 for each of their dependent children under age 17, is designed to help families offset the costs of raising children. Unlike the EITC, the CTC is not targeted on low- and moderate-income families but extends to middle-income and most upper-middle-income families.
The CTC is partially refundable: a family whose credit exceeds its federal income tax liability can receive a refund for the rest of the credit — but the refund cannot exceed 15 percent of the amount by which the family’s earnings exceed a minimum earnings threshold, which is now $3,000. The low-income (i.e., partially refundable) part of the CTC is particularly beneficial to lower-wage workers.
The EITC significantly increases the work effort of its recipients, according to substantial research over the past 15 years.
EITC expansions between 1984 and 1996 accounted for more than half of the large increase in employment among single mothers during that period, researchers found. The most significant gains in employment attributable to the EITC occurred among mothers with young children and mothers with low education. 
The EITC is particularly effective at encouraging work among single mothers working for low wages, and is considered among the most effective policies for increasing the work and earnings of female-headed families. The EITC expansions of the 1990s “appear to be the most important single factor in explaining why female family heads increased their employment over 1993-1999,” University of Chicago economist Jeffrey Grogger has concluded. Those expansions, he found, actually had a larger effect in increasing employment among single mothers than the 1996 welfare law. (See Figure 1.) In addition, women who were eligible to benefit the most from those EITC expansions apparently had higher wage growth in later years than other similarly-situated women.
Moreover, by boosting the employment and earnings of working-age women, the EITC also boosts their Social Security retirement benefits, which should result in lower poverty among them in old age.  (Social Security eligibility and benefit levels are based on how much one works and earns.)
By boosting employment among single mothers, the EITC also produces large declines in the numbers of families that receive cash welfare assistance. The EITC expansions of the 1990s induced more than a half a million families to move from cash welfare assistance to work, research shows. In fact, the research found, those EITC expansions likely contributed about as much to the fall in the numbers of female-headed households receiving cash welfare assistance from 1993 to 1999 as the time limits on cash assistance and other changes under welfare reform.
Nor is there much evidence that when EITC benefits phase down as a family’s income rises above certain levels, workers substantially reduce their work hours. Instead, research shows, the EITC has a powerful effect in inducing many more workers to enter the labor force and go to work.
Improving Infants’ Health
The EITC may improve the health of infants.
Researchers at the University of California at Davis compared changes in birth outcomes for mothers who likely received the largest increases in their EITCs under the expansions of the 1990s and mothers who likely received the smallest increases. They found that (1) infants born to mothers who likely received the largest increases had the greatest improvements in a number of birth indicators, such as fewer incidences of low weight births and premature births; (2) mothers who likely received the largest increases were likelier to receive prenatal care, including care before the critical third trimester, and to smoke and drink less during pregnancy; and (3) changes in health insurance coverage did not seem to be a primary explanation for these improved health outcomes. 
These results mirror a small but promising body of research on the EITC’s impact on the health of newly born infants. Previous studies also found strong associations between EITC expansions and improvements in birth weight. Those studies also indicated that mothers who received the EITC were less likely to smoke during pregnancy than similarly-situated mothers who did not receive the EITC.
Boosting Children’s School Achievement
The EITC and other income-enhancing measures improve the educational outcomes of young children in low-income families, recent research indicates.
When researchers analyzed ten anti-poverty and welfare-to-work experiments, they found a consistent pattern of better school results for low-income children in programs that provided more income. Each $1,000 increase (in 2001 dollars) in annual income — the equivalent of a full CTC for one child — for two to five years led to modest but statistically significant increases in young children’s school performance on a number of measures, including test scores. While not specifically analyzing the EITC’s impact, the researchers noted that their results have important implications for income-boosting policies like the EITC “that link increases in income to increases in employment.”
Other researchers at Harvard and Columbia University analyzed data for grades 3-8 from a large urban school district and the corresponding U.S. tax records for families in the district. Even under conservative assumptions, they found, additional income from the EITC and CTC leads to significant increases in students’ test scores.  Likewise, researchers who studied nearly two decades of data on mothers and their children concluded that additional income from the EITC raises the combined math and reading test scores of students by similarly-large magnitudes. 
All of the studies cited in the previous two paragraphs used different datasets and analytical techniques. Nevertheless, they found similarly-sized effects for a given increase in income — a fact that bolsters the findings of all three analyses. In a review of the evidence, Greg Duncan (University of California Irvine) and Katherine Magnuson (University of Wisconsin) conclude that a credit worth about $3,000 (in 2005 dollars) to a working parent during a child’s early years may boost that child’s achievement by the equivalent of about two extra months of schooling.
Gordon Berlin, the president of MDRC — one of the nation’s leading research organizations that is known for its rigorous evaluation of anti-poverty and welfare-to-work programs — summarized the results this way:
[There is] a remarkably strong body of research — much of it based on large-scale, well-implemented, experimental research designs — showing that supplementing the earnings of parents helps raise families out of poverty and improves the school performance of young children. This point is so important — and to many so surprising — that I want to state it again: We have reliable evidence involving thousands of families in multiple studies demonstrating that “making work pay” causes improvements in young children’s school performance.
Boosting Work Effort and Earnings When Children Reach Adulthood
The EITC not only boosts the work effort of parents, particularly single mothers. It extends those benefits to the next generation, recent research suggests.
With more family income through refundable tax credits, children in the family are likelier to attend college and earn more as adults. In fact, researchers found that each dollar of income through tax credits may increase the real value of the child’s future earnings by more than one dollar.
For children in low-income families, a $3,000 increase in family income (in 2005 dollars)  between a child’s prenatal year and fifth birthday is associated with an average 17 percent increase in annual earnings and an additional 135 hours of work when the children become adults, compared to similar children whose families do not receive the added income, researchers have found. (See Figure 2.)
Young children who are raised in lower-income families tended to work less and earn less as adults than higher-income children raised in otherwise similar circumstances. One reason, according to an emerging field of research, may be that the low-income children are more likely to experience poor health as children and in some cases their poor health carries into adulthood. But children in households that receive the EITC appear likelier to avoid the early onset of disabilities and other illnesses associated with child poverty, and that apparently increases their ability to earn more as adults.
In short, studies indicate, young children in low-income families that receive the type of income support that the EITC and CTC offer perform better in school, on average, and are likelier to be born healthier and grow up to work more and earn more. “When analyzing the costs and benefits of policies such as the Earned Income or Child Tax Credit,” researchers from Harvard and Columbia University advised, “policymakers should carefully consider the potential impacts of these programs on future generations.”
The EITC reduces poverty in two ways: (1) by encouraging work and (2) by supplementing the wages of low-paid poor or near-poor workers.
Many Americans work for low wages. For example, the food-preparation sector (cooks, servers, dishwashers, and the like), which employs 11 million people and accounts for about one in every 11 jobs, provided a median wage of only $9.09 an hour in 2011. A full-time, year-round worker at that wage level would have annual earnings of $18,180 — or 80 percent of the poverty line for a two-adult, two-child family.
For many workers, working substantial hours is not enough to lift them out of poverty. The recent recession and slow recovery have aggravated the situation. The share of workers paid below-poverty wages (hourly wages too low to support a family of four at the poverty line even with full-time, year-round work) rose from 25.5 percent of employed workers in 2009 to 28 percent in 2011.  While 60 percent of the jobs lost during the recession were mid-wage jobs, only 22 percent of the jobs gained during the recovery were mid-wage jobs, the National Employment Law Project has found in an analysis that goes through the first quarter of 2012. Lower-wage jobs, in contrast, represented 21 percent of the jobs lost during the recession but 58 percent of jobs gained during the recovery.
The share of Americans earning low wages could keep growing even when labor market conditions improve. “Good jobs are not disappearing for everyone, but . . . they are largely disappearing for less-educated workers,” Urban Institute economist Harry Holzer and his coauthors from the National Science Foundation, the University of Chicago, and the Treasury Department have written.
Meanwhile, policymakers have let the minimum wage erode substantially, especially in the 1980s, and subsequent increases have not fully offset that erosion. At $7.25 an hour in 2013, the minimum wage is 21 percent below its 1968 level, after adjusting for inflation.
In addition, the median or typical wage paid for four of the ten occupations that the Bureau of Labor Statistics expects to generate the most new jobs over the next decade — home health aides, food preparers, personal care aides, and retail salespersons — was below a poverty-level wage in 2010.
By supplementing the earnings of low-paid workers, nationally the EITC and CTC lifted 10.1 million people, including 5.3 million children, out of poverty in 2012 under the federal government’s new Supplemental Poverty Measure, which counts non-cash public benefits and refundable tax credit payments as income, as many analysts favor. Of these 5.3 million children, the EITC alone lifted 3.3 million of them out poverty.
Of the 10.1 million people whom the EITC and CTC lifted out of poverty, improvements in the credits under the 2009 Recovery Act were responsible for raising about 1.5 million of them above the poverty line (see Figure 3) — about 900,000 people from the CTC improvements and another 600,000 from the EITC improvements.
Providing a Short-Term Safety Net
The EITC provides ongoing income support for some low-wage workers, but it helps an even larger group of workers meet a temporary need. “The EITC,” researchers found, “acts as a short-term safety net to many taxpayers who claim the EITC for short periods during shocks to income or family structure” — a child’s birth, for instance, or one spouse’s loss of income — after which their earnings grow again.
Some 61 percent of those who received the EITC between 1989 and 2006 did so for only a year or two at a time (see Figure 4).  About half of all taxpayers with children used the EITC at least onceduring that 18-year period. With its broad but temporary reach, the EITC provides critical income insurance for working families that face hardship or must care for newborns or very young children.
In addition, EITC recipients pay significant federal income taxes over time, even though they may receive more in EITC benefits in a given year than they pay in federal income taxes in that year. In a forthcoming study, researchers report thattaxpayers who claimed the EITC at least once from 1989 through 2006 paid a few hundred billion dollars more in federal income taxes over that period than they received in EITC benefits.
Moreover, low-income households also pay substantial state and local taxes. Most state and local tax systems are regressive, meaning that low-income families pay a larger share of their incomes in these taxes than more affluent households do. The bottom-fifth of households paid an average of 12.3 percent of their incomes in state and local taxes in 2011, according to the Institute on Taxation and Economic Policy, compared to 11.3 percent for the middle-fifth of households and 7.9 percent for the top 1 percent of households. (ITEP also found that for most states, families in the bottom income fifth paid a larger share of their incomes in state and local income, property, sales, and excise taxes than families in the top end of the distribution.)
The recent research on the EITC and similar income-boosting measures is noteworthy and important. It shows that the credit does much more than reduce poverty and provide a short-term safety net for the low-income working families that receive it. The EITC, which goes to between 25 and 30 million low- and moderate-income families, also provides income, employment, educational, and health benefits that, for children, can extend into adulthood.
 For more on how the EITC operates, see “Policy Basics: The Earned Income Tax Credit,” Center on Budget and Policy Priorities, updated February 1, 2013, http://www.cbpp.org/cms/index.cfm?fa=view&id=2505.
 The credit value is determined by IRS tables in the Form 1040 instructions that use $50 increments for the filer’s earned income amount. For example, if a filer earned $8,278, the filer would be in the $8,250-$8,300 earnings bracket, which uses $8,275 to calculate the dollar amount for the EITC for all filers with earnings in that bracket.
 Tax Policy Center Table T13-0117.
 The CTC begins to phase out at incomes of $75,000 for single parents filing as heads of household, $110,000 for married couples filing jointly, and $55,000 for married couples filing separately. The income level at which the credit phases out completely depends on the number of qualifying children. For example, the credit phases out at $150,000 for married couples filing jointly with two children.
 For a summary of research on the EITC, see V. Joseph Hotz and John Karl Scholz, “The Earned Income Tax Credit,” in Robert A. Moffitt, ed., Means-Tested Transfer Programs in the United States (Chicago: The University of Chicago Press, 2003) and Bruce Meyer, “The Effects of the Earned Income Tax Credit and Recent Reforms,” in Jeffrey R. Brown, ed., NBER Book Series Tax Policy and the Economy (National Bureau of Economic Research, 2010), http://www.nber.org/chapters/c11973. The refundable CTC is much newer and has not been studied as extensively.
 See Bruce D. Meyer and Dan T. Rosenbaum, “Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects,” in Bruce D. Meyer and Douglas Holtz-Eakin, eds., Making Work Pay: The Earned Income Tax Credit and Its Impact on America’s Families (New York: Russell Sage Foundation, 2001) and Bruce D. Meyer and Dan T. Rosenbaum, “Welfare, The Earned Income Tax Credit, and the Labor Supply of Single Mothers,” Quarterly Journal of Economics 116(3): 1063-2014.
 Economists Nada Eissa and Jeffrey B. Liebman of the Kennedy School of Government also found that the EITC was particularly effective at encouraging work among mothers with low education. Nada Eissa and Jeffrey B. Liebman, “Labor Supply Response to the Earned Income Tax Credit,” Quarterly Journal of Economics (May 1996).
 Chris M. Herbst, “The labor supply effects of child care costs and wages in the presence of subsidies and the earned income tax credit,” November 17, 2009, http://www.chrisherbst.net/files/Download/C._Herbst_Labor_Supply_Effects.pdf.
 Grogger, 2003.
 Molly Dahl, Thomas DeLeire, and Jonathan A. Schwabish, “Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth,” Institute for the Study of Labor, revised April 2009, http://ftp.iza.org/dp4146.pdf.
 Molly Dahl, Jonathan Schwabish, Thomas DeLeire, and Timothy Smeeding, “The Earned Income Tax Credit and Expected Social Security Retirement Benefits Among Low-Income Women,” Congressional Budget Office, revised March 5, 2012, http://www.cbo.gov/publication/43033.
 Stacy Dickert, Scott Houser, and John Karl Scholz, “The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation,” Tax Policy and the Economy, Vol. 9, MIT Press, 1995. V. Joseph Holt, Charles H. Mullin, and John Karl Scholz also showed that the EITC was an important tool encouraging welfare recipients to enter the labor force. V. Joseph Holt, Charles H. Mullin, and John Karl Scholz, “Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare,” NBER Working Paper No. 11968, January 2006, http://www.nber.org/papers/w11968.
 Jeffrey Grogger, “The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Head Families,” Review of Economics and Statistics, May 2003. Using different data, in another study, Grogger reaches similar conclusions. Jeffrey Grogger, “Welfare Transitions in the 1990s: the Economy, Welfare Policy, and the EITC,” NBER Working Paper No. 9472, January 2003, http://www.nber.org/papers/w9472.pdf.
 Once EITC recipients reach the phase-out range, recipients with no children have their EITC reduced by 8 cents for each additional dollar earned, recipients with one child have their EITC reduced by 16 cents, and recipients with two or more children have their EITC reduced by 21 cents. In theory, the phase-out could discourage additional hours of work among those with incomes in the phase-out range. The only studies to find a reduction in work hours, however, have found such effects to be small. Moreover, those studies generally found such effects only among married EITC recipients, and many analysts believe this effect is likely due largely to the fact that the additional income the EITC provides allows the second earner in some married families to choose to spend more time raising children and less time working out of the home. Analysts across the political spectrum have observed that the fact that the EITC may lead some married parents to make such a choice should not be regarded as an adverse policy outcome. See David T. Ellwood, “The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements,” June 2010, http://www.ipr.northwestern.edu/jcpr/workingpapers/wpfiles/ellwood_eitc99_update.PDF.
 The authors controlled for welfare reform, changes in Medicaid or CHIP income eligibility thresholds, the unemployment rate, and the unique impact that belonging to a particular demographic or socio-economic group, living in a particular state, having a particular number of children, and idiosyncrasies of a particular year might have on the incidence of low birth weights for each group of women in their analysis.
 Hilary W. Hoynes, Douglas L. Miller, and David Simon, “The EITC: Linking Income to Real Health Outcomes,” University of California Davis Center for Poverty Research, Policy Brief, 2013, http://poverty.ucdavis.edu/research-paper/policy-brief-linking-eitc-income-real-health-outcomes.
See studies cited in footnote 4.
 For a discussion of the research on the impact of early childhood poverty, see Greg J. Duncan and Katherine Magnuson, “The Long Reach of Early Childhood Poverty,” Pathways, Winter 2011, pp. 22-27, http://www.stanford.edu/group/scspi/_media/pdf/pathways/winter_2011/PathwaysWinter11_Duncan.pdf. For a more technical discussion of the evidence, see Greg J. Duncan, Pamela A. Morris, and Chris Rodrigues, “Does Money Really Matter? Estimating Impacts of Family Income on Young Children’s Achievement with Data from Random-Assignment Experiments,” Developmental Psychology (June 2011), pp. 1263–1279.
 Duncan, Morris, and Rodrigues, 2011.
 Raj Chetty, John N. Friedman, and Jonah Rockoff, “New Evidence on the Long-Term Impacts of Tax Credits,” Statistics of Income Paper Series, November 2011, http://www.irs.gov/pub/irs-soi/11rpchettyfriedmanrockoff.pdf.
 Gordon Dahl and Lance Lochner, “The Impact Of Family Income On Child Achievement: Evidence From The Earned Income Tax Credit,” American Economic Review (2012), pp. 1927-1956, http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1927.
 Duncan and Magnuson, “The Long Reach of Early Childhood Poverty,” Winter 2011, which is based on an analysis of studies, including those cited here, of the impact of early-childhood poverty.
 Gordon L. Berlin, remarks at National Summit on America’s Children, May 22, 2007, http://www.mdrc.org/investing-parents-invest-children.
 Chetty, Friedman, and Rockoff 2011.
 The authors refer to pre-tax income here. However, they had fairly similar findings when they re-estimated their models using a measure of childhood income that subtracted federal income taxes.
 The paper says 19 percent, but our calculations, confirmed by one of the authors, show that this is a typographical error and 17 percent is correct. Duncan, Ziol-Guest, and Kalil, 2010.
 Kathleen M. Ziol-Guest, Greg J. Duncan, Ariel Kalil, and W. Thomas Boyce, “Early childhood poverty, immune-mediated disease processes, and adult productivity,” Proceedings of the National Academy of Sciences of the United States of America(October 16, 2012), 17289-17293.
 Chetty, Friedman, and Rockoff, 2011.
 Bureau of Labor Statistics, Occupational Employment Statistics, http://www.bls.gov/oes/current/oes_nat.htm; U.S. Census Bureau, http://www.census.gov/hhes/www/poverty/data/threshld.
 For example, nearly 11 million workers lived below the official poverty line in 2011; these workers worked an average of 32 hours per week for 35 weeks of the year. CBPP analysis of March 2012 Current Population Survey.
 The figures here contrast job losses between the first quarter of 2008 and the first quarter of 2010 with job gains between the first quarter of 2010 and the first quarter of 2012. The National Employment Law Project defines lower-wage jobs as those with median hourly wages from $7.69 to $13.83 (in 2012 dollars) and mid-wage jobsas those with median hourly wages from $13.84 to $21.13. To place these figures in context, in 2012, the year-round, full-time earnings of a lower-wage job are equivalent to between 66 percent and 119 percent of a two-adult, two-child family’s poverty threshold. National Employment Law Project, “The Low-Wage Recovery and Growing Inequality,” August 2012, http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
 Harry J. Holzer, Julia I. Lane, David B. Rosenblum, and Fredrik Andersson, Where are All the Good Jobs Going? (New York: Russell Sage Foundation, 2011), p. 17.
 We define the poverty-level wage as the wage level needed to bring a family of four to the poverty line with full-time, year-round work.
 For state-by-state anti-poverty and other numbers relating to the credits, see our state fact sheets here:
 CBPP analysis of the Census Bureau’s March 2013 Current Population Survey and SPM public use file.
 The figures do not add to the total because more people are lifted above the poverty line by the joint impact of the CTC and EITC (1.5 million) than by the sum of the two credits counted separately.
 Dowd and Horowitz, 2011.
 These findings do not imply that EITC recipients only use the EITC once or twice over their entire working career. Rather, they suggest that the majority of EITC recipients use the credit for short periods at a time.
 Dowd and Horowitz, 2011.
 Authors’ communications with Tim Dowd of the Joint Committee on Taxation and John B. Horowitz of Ball State University, October 18, 2011.
 Carl Davis et al., “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” 4th Edition, Institute on Taxation and Economic Policy, January 2013, http://itep.org/itep_reports/2013/01/who-pays-4th-edition.php.