Director of Federal Tax Policy
Rigorous and extensive research tells a success story we have explained about the Earned Income Tax Credit (EITC): it boosts employment, reduces poverty, and improves the lives of millions of hard working, poor families. And, recently, research has shown that the EITC’s benefits extend to the next generation through better school performance and greater work effort in adulthood.
Despite the consensus that such mainstream research has reached, the Tax Foundation, well known for its ideological leanings, has issued a flawed study that concludes that the EITC’s phase-out at higher income levels “depresses the labor supply by more than the phase-in bolsters the labor supply.”
That gets the EITC’s positive effects backwards — and flatly contradicts established research. Repeated studies have shown that the EITC affects people’s decision whether to work, with the overall trend that it pulls people into the labor market and increases their after-tax income. In contrast to the Tax Foundation’s assertion, evidence shows that the EITC’s phase-out doesn’t substantially reduce the number of hours of those who are already working.
Economists Nada Eissa of Georgetown University and Hilary Hoynes of the University of California summarize the evidence this way:
[T]here is overwhelming evidence the EITC encourages work among single mothers but little evidence that eligible-working women adjust their hours of work in response to the EITC. Perhaps most striking about these findings is their consistency across different empirical methods […] as well as different EITC expansions.
Research does find evidence that some two-earner families with children in the “phase out” range for the EITC may reduce their hours worked modestly. Many analysts believe that, in effect, the EITC is making it possible for one spouse to spend more time raising children (and potentially reducing child care costs) while the other works outside the home.
Based on its flawed finding, the Tax Foundation says eliminating the EITC would free up enough revenue to pay for a 5.7 percent across-the-board personal income tax rate cut. (This idea stands in stark contrast to some conservatives’ suggestion that the credit actually be expanded.)
Such a policy would have damaging consequences, for both working-poor families and the economy:
Decreased employment. Repealing the EITC would actually decrease employment, contrary to the Tax Foundation’s assumptions. Careful studies have documented that EITC expansions in the 1990s moved 500,000 people from welfare to work and that those expansions were at least as important as welfare reform in boosting employment among single mothers.
Millions of working people thrown into poverty. In 2011, the EITC, coupled with the refundable Child Tax Credit, lifted 9.4 million people — including 4.9 million children — out of poverty, using the Supplemental Poverty Measure. The harsh repeal suggested by the Tax Foundation would push millions of low-income working Americans into poverty.
Another tax cut for the wealthiest Americans, at the expense of low-income families. Across-the-board cuts in tax rates are regressive, disproportionately benefitting people at the top of the income scale, as we have explained. The rate cut suggested by the Tax Foundation and the repeal of the EITC would result in a large transfer from low-income families who often struggle to make ends meet to wealthier households, exacerbating already-wide income inequality.