 Introduction
The US welfare system is characterised by means tested assistance to low income families - the old Aid to Families with Dependent Children (AFDC), Temporary Assistance to Needy Families (TANF), Medicaid and food stamps.
These (and their predecessors) are a fragmented response to poverty and in the 1960s and 1970s many policymakers favoured introducing Negative Income Taxes as a comprehensive anti-poverty program. The Earned Income Tax Credit (EITC) began life as part of an effort by Senator Russell Long (D-LA) to head off NIT proposals. Much of the opposition to a NIT derived from the fact that the bulk of the payments would go to out of work families and thus would reduce work incentives. The EITC was introduced in 1975 and became permanent in 1978. The main objective in these early years was the reduction of taxes for low income families and the improvement of work incentives - laying the basis for bipartisan support for the EITC.
The generosity of the EITC was substantially increased in 1986, 1990 and 1993. Over these years the tax credit developed from a modest work incentive scheme into a major anti-poverty programme (and along the way lost its bipartisan support - becoming increasingly associated with the Democrats.)
Details
The EITC is not a tax credit in which payments are set-off against tax liabilities. The tax credit is paid in full on an annual basis to low paid working families with children.
In 1999, for example, families (with two or more children) earning under $9,540 receive a credit of 40% of income - up to $3,816. This maximum credit is paid until earnings reach $12,460. For every extra $ earned the tax credit is then reduced by 21.06% of earnings until the it is phased out entirely when gross earnings reach $30,585. The chart below shows the structure of the EITC for such a two child household.
The federal nature of the US means that individual States can complement the Federal EITC. As of 2000 fourteen states and Washington DC have such EITCs. For example, in New York the state EITC is 20% of the Federal credit. Two noteworthy EITC structures are those of Wisconsin and Minnesota.
Wisconsin's state EITC pays extra for extra children: 4% of the federal credit for one child, 14% for two, and 43% for three or more children.
Minnesota's EITC includes a second phase-in range - which aims to integrate the EITC better with local welfare benefits and reduce poverty and unemployment traps. See here for more details.
Further Reading
Lisa Barrow and Leslie Moscow McGranahan, "The Earned Income Credit and Durable Goods Purchases", Joint Center for Poverty Research US
Rebecca M. Blank, David Card, and Philip K. Robins, "Financial Incentives for Increasing Work and Income Among Low-Income Families", Joint Center for Poverty Research US
Stacy Dickert-Conlin and Douglas Holtz-Eakin, "Employee-Based versus Employer-Based Subsidies to Low-Wage Workers: A Public Finance Perspective", Joint Center for Poverty Research US
David T. Ellwood, "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements", Joint Center for Poverty Research US
Carolyn J. Hill, V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz, "EITC Eligibility, Participation, and Compliance Rates for AFDC Households: Evidence from the California Caseload", Joint Center for Poverty Research US
Janet Holtzblatt and Robert Rebelein, "Measuring the Effect of the EITC on Marriage Penalties and Bonuses", Joint Center for Poverty Research US
V. Joseph Hotz and John Karl Scholz, "The Earned Income Tax Credit", Working Paper for NBER Conference 2000 US
V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz, "The Earned Income Tax Credit and Labor Market Participation of Families on Welfare", Joint Center for Poverty Research US
JCPR Policy Brief (Vol. 3, No. 1): The Illinois Earned Income Tax Credit: JCPR Legislative Research Briefing", Joint Center for Poverty Research US
Jeffrey Liebman, "Lessons About Tax-Benefit Integration from the US Earned Income Tax Credit Experience, Joseph Rowntree Foundation, 1997 UK and US
Jeffrey B. Liebman, "Who are the Ineligible EITC Recipients?", Joint Center for Poverty Research US
Nina Manzi and Joel Michael, "The Federal Earned Income Tax Credit and The Minnesota Working Family Credit" , 2000 US
Janet McCubbin, "EITC Noncompliance: the Misreporting of Children and the Size of the EITC", Joint Center for Poverty Research US
Bruce D. Meyer and Dan T. Rosenbaum, "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects", Joint Center for Poverty Research US
Bruce D. Meyer and Dan T. Rosenbaum, "Welfare, the Earned Income Tax Credit, and the Employment of Single Mothers", Joint Center for Poverty Research US
Charles Michalopoulos, Philip K. Robins, and David Card, "When Financial Incentives Pay for Themselves: Early Findings from the Self-Sufficiency Project's Applicant Study", Joint Center for Poverty Research US
David Neumark and William Wascher, "Using the EITC to Increase Family Earnings: New Evidence and a Comparison with the Minimum Wage", Joint Center for Poverty Research US
Jennifer L. Romich and Thomas Weisner, "How Families View and Use the EITC: The Case for Lump-sum Delivery", Joint Center for Poverty Research US
Timothy M. Smeeding, Katherin Ross Phillips, Michael O'Connor, and Michael Simon, "The Economic Impact of the Earned Income Tax Credit (EITC)", Joint Center for Poverty Research US
Dennis J. Ventry, "The Collision of Tax and Welfare Politics: The Policy History of the EITC, 1969 - 1999", Joint Center for Poverty Research US
Robert Walker and Michael Wiseman, "The Possibility of a British Earned Income Tax Credit", Fiscal Studies, Vol 18, No 4, 1997 UK
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