The Earned Income Tax Credit and the U.S. Low-Wage Labor Market

The Earned Income Tax Credit (EITC) is the largest cash or near-cash U.S. antipoverty program. Taxpayers gain access to the EITC by having incomes below certain thresholds and by filing a tax return. For a taxpayer to receive a larger EITC available to families with children, the EITC-qualifying child must live with the taxpayer more than half the year. In this paper I will discuss the EITC and low-wage labor markets in the United States. Section 1 provides an overview of public assistance programs available to low-income Americans. The U.S. safety net provides an extensive but patchwork set of means-tested transfer and social insurance programs, with the result that individuals and households with similar incomes may receive quite different benefits. Households with children, particularly those with single parents, may receive cash benefits, food assistance, health insurance school meals, and possibly housing assistance. Disabled individuals may receive more generous cash payments and health insurance. Most elderly people receive social security (the public old-age pension), health insurance, and those with low income may instead receive cash payments and benefits from a different health insurance program. Able-bodied, prime-age childless adults may receive food assistance for short time periods. I briefly describe this extensive set of programs and the empirical magnitudes of benefits received by families and individuals in specific circumstances. Section 2 of the paper discusses the EITC. I describe the evolution of the credit and summarize the research evidence on its targeting and anti-poverty effectiveness, effects on labor supply, EITC administration and compliance, and how the EITC fits into the broader safety net. As mentioned, the EITC plays a central role in U.S. antipoverty policy. But because the credit is available only to those with income, it provides nothing to those who are unable or unwilling to work. Section 3 of the paper discusses three challenges confronting U.S. antipoverty policy, and the ability of the EITC to effectively address these problems. The problems include, first, the striking increase in the number of individuals (without children - these are referred to as "unrelated individuals" in Census Bureau terminology) who have incomes below the poverty line. These trends are driven, in part, by a disturbing increase in the fraction of males with low levels of education that are not in the paid labor market. Second, the U.S. safety net is now strongly oriented around work. This raises the question of what, from the vantage point of society, we do to support those who, for one reason or another, are unwilling or unable to work. Third, while the structure of the safety net is, to a degree not seen in the U.S., oriented toward work, there is little evidence on effective approaches that can foster a progression of wage increases that will help people achieve self-sufficiency. Policy implications are addressed in the final section of the paper. There I discuss issues that likely would arise in other countries if those policymakers (and citizens) want to implement an EITC-like policy. Considerations include: the difficulties that may arise when designing a family-based credit in a tax system that is based on individuals as the unit of taxation. The treatment of the self employed. The timing of EITC payments: whether a payment is made annually or more frequently. Whether there should be an hours or earnings requirement associated with EITC eligibility. And whether other features of an economy and its safety net may enhance or detract an EITC-like policy's effectiveness.