Using data from the National Longitudinal Survey of Youth, this study (N = 1,504) showed that about half the EITC eligible tax fliers in 2001 did not file EITC tax returns and that differences between EITC tax fliers and non-EITC tax fliers varied by birth place, Food Stamp program participation, marital status, race, residence, sex, socioeconomic history, and worker classification. Findings suggested that the EITC is well targeted in the sense that economically marginalized groups are likely to participate and that increased outreach efforts are also needed to ensure greater participation among tax fliers eligible for the EITC but who are less likely to claim it, especially self-employed persons and those residing in the Northeast.

Keywords: Earned income tax credit (EITC), poverty, social policy, tax policy, welfare reform

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The Earned Income Tax Credit (EITC) is one of the most significant cash-transfer programs for low-income families in the United States. It serves single and/or married individuals, with or without children, as long as they meet income eligibility. The EITC offsets in part the erosion of Federal responsibility to poor families, formalized by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 which ended the entitlement nature of means-tested cash-based welfare provision (Bok & Simmons, 2002; Careley, 1996; Ozawa, 1995). EITC expenditures exceed those of Food Stamps and the Temporary Assistance for Needy Families (TANF) program, although they fall shy of the Supplemental Security Income (SSI) program. Although the EITC currently targets working poor individuals regardless of whether they have children, it lifts more children out of poverty than any other means-tested or social insurance program (U.S. Congress, 2004b, 2004c). It raises the income of many low-income workers above the poverty line, increases labor force participation among low-income single mothers, and enables many low-income families in general to meet immediate consumption as well as longer-term investment needs (Center on Budget and Policy Priorities, 1998).

Despite some misgivings in regard to compliance, the EITC has enjoyed bi-partisan political support since its inception in 1975 when it was viewed as a means of providing an offset to Social Security (payroll) taxes paid by low-income workers with children. It retains a pro-work, pro-family, and anti-welfare appeal that both Republican and Democratic presidential administrations have used to justify the 30-year Federal subsidy to low-income families. The EITC has become one of the main Federal programs to subsidize the working poor, to provide an economic incentive to retain their labor force attachment, and thereby to decrease their likelihood of remaining in poverty and of relying on TANF, Food Stamps, and other forms of public assistance.

This paper provides an overview of the EITC program and it reports results of a study that examined the likelihood of EITC participation among eligible taxpayers in 2001. The comparison between eligible participants and non-participants should provide insight into why some eligible households fail to claim the credit and help increase the effectiveness of EITC outreach efforts.

Literature Review

About the EITC

The EITC is one of nine major means-tested programs. The others are Food Stamps, Medicaid, Supplemental Security Income (SSI), TANF, the child support enforcement program, programs subsidizing child care, housing programs, and employment and training programs. The EITC is a unique means-tested program because it is a refundable tax credit. That is, if the amount of the credit exceeds the taxpayer's Federal income tax liability, the excess is payable to the taxpayer as a direct transfer payment. As a transfer payment, the EITC is like other Federal programs that provide poor and low-income families with public benefits. Since it requires earnings, the EITC is unique from other Federal benefit programs (U.S. Congress, 2004c). As a tax expenditure, the EITC is like the deduction of home mortgage interest (HMI) and the exclusion of employer pension (EPP) contributions from income, the two largest and best-known tax expenditures, which, however, are not means-tested (Holtzblatt, 2000). Howard (1997) provides a useful guide to the historical and political precedents of tax expenditures with social policy objectives, including the targeted jobs tax credit (TJTC), in addition to the EITC, HMI, and EPP. Weisbach and Nussim (2004) provide a more technical discussion of organizational and institutional design issues relevant to an integration of tax and spending programs.

Enacted during the Ford administration in 1975 as a way to offset the burden of Social Security tax on low-income working parents, the EITC generally equals a specified percentage of wages up to a maximum dollar amount. The maximum amount applies over a certain range of income and diminishes to zero over a certain income range. The EITC thereby has three ranges: phase-in, maximum credit, and phase-out. In the phase-in range, the EITC acts as a wage subsidy--as the family earns more, the transfer increases. In the maximum credit range, the transfer remains constant regardless of earnings. In the phase-out range, the EITC acts like a negative income tax--as the family earns more, the transfer is reduced. While the phase-in range provides a work incentive, the maximum and phase-out ranges have work disincentives for some families (Horowitz, 2002; see Moffitt (2003) for a history of the negative income tax in U.S. welfare policy). The income ranges and percentages have increased several times since 1975, expanding the credit, as have the numbers of participants. The 1975-2003 EITC parameters can be found in U.S. Congress (2004c); the corresponding number of recipient families and amount of credits can be found in U.S. Congress (2004b). It should be noted that unlike public assistance programs in some states, single-parent and two-parent families with similar income levels receive the same EITC benefit. Additionally, two-parent families with similar income levels receive the same EITC benefit regardless of whether one or both parents work (Greenstein & Shapiro, 1998).