Earned Income Tax Credit (EITC) Research Paper

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Finally, a 1998 Center on Budget and Policy Priorities report, examined research, data and findings on the EITC found that when this research was summarized to its substantiate bits, several positive themes over the benefits of the EITC emerged. They include (Greenstein & Shapiro, 1998):

Substantial positive effects on inducing single parents to work. A study by Northwestern University economists Bruce Meyer and Dan Rosenbaum. Meyer and Rosenbaum found that more than half of the substantial increase in employment rates among single mothers over the 1984 to 1996 period was due to EITC expansions; a larger effect on single mother employment than all other factors combined (Greenstein & Shapiro, 1998).

EITC offsets between one-fourth and one-third of the decline during the past 20 years in the share of national income received by the poorest fifth of households with children (Greenstein & Shapiro, 1998).

Among working families, particularly in the south where working families are likely to have lower wages and thus are more likely to qualify for the EITC, the EITC lifts substantially more children out of poverty than any other government program or category of programs.

A study by Columbia University's National Center for Children in Poverty found that the EITC reduces poverty among young children by nearly one fourth. (Greenstein & Shapiro, 1998)

Data from the Census Bureau's Population Survey show that in 1996, the EITC elevated the incomes of some 4.6 million people in low-income working families who would have been below the poverty level without it; more than half of those who benefitted -- 2.4 million people -- were children (Greenstein & Shapiro, 1998)

The EITC is not, however, without its detractors. A 2005 study looking at the effect of the EITC comparing the labor market behavior of eligible parents in Wisconsin found that the EITC had no effects on the number of hours the family worked. While other studies looked at the behavior of families over time, this study looked specifically at the behaviors of eligible families with three children in the state of Wisconsin, which supplements the federal EITC for families with three children, to that of similar parents that do not supplement the federal EITC (the Federal EITC for families with 2 children is identical to that for families with 3 children) (Cancian & Levinson, 2005).

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Although the study points out many problems with doing longitudinal studies, it has two key problems. The first is it fails to deal with the structural and policy differences from state to state, and secondly it fails to take into consideration how many of the people it's looking at are actually making use of the EITC, for participation is the EITC's Achilles heel.

In order to receive the EITC in most cases one has to not only work but also file a federal income tax return. The General Accounting Office estimated that in 1999 only about 75% of households who were eligible for the credit actually claimed it; households with one or two children had the highest participation rates, but only 62.5% of eligible households with three or more children claimed the credit in 1999, and only 44.7% of eligible child households claimed it (Cordes, Ebel, & Gravelle, 2005). In other words, it's not surprising that the Wisconsin study found almost no difference in labor participation in those families with three or more children, because they are the second least likely type of household to take participate in the program (why that is, is perhaps the topic for another paper).

Overall, for most categories of the poor the EITC seems to do what it sets out to do, alleviate poverty without creating barriers to work. This is good news because the way the program is administered -- through the IRS creates several key benefits. Administrative costs for traditional cash assistance programs such as TANF and food stamps can run as high as 15%, the EITC runs a paltry 1% in comparison (the Jacob France Institute, 2004). In addition, it manages to be relatively efficient without running up employer costs, and while also potentially creating new jobs vis-a-vis the multiplier effect......

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