Four Reasons to Expand and Reform the Earned Income Tax Credit

The nonpartisan Congressional Research Service (CRS) just released a report that makes a strong case for making permanent EITC provisions that are set to expire in 2017 and also improving the credit for low-income workers without children.

The 2009 American Recovery and Reinvestment Act (ARRA) expanded the EITC by temporarily increasing benefits for families with more than two children and increasing the income level at which the credit phases out for married couples. However, these two improvements are slated to expire at the end of 2017, which Citizens for Tax Justice (CTJ) estimates would result in a decrease or loss of benefits for approximately 6.3 working million families, including 14.7 million children.

The following are four of the main takeaways from the CRS report.

1. EITC Increases Employment

There is strong empirical evidence that the EITC increases labor force participation among single mothers. In fact, one study found that 34 percent of the increase in employment for this group between 1993 and 1999 can be attributed to expansions of the EITC.

2. EITC Reduces Poverty

The EITC has been associated with significant reductions in poverty for households with children. For example, studies have found the EITC reduces poverty rates for single workers with one child by about 15 percent and for married couples with three children by nearly 30 percent.

3. EITC Benefits Much Greater for Workers with Children than for Childless Workers

While the EITC leads to substantial poverty reduction among recipients with children, it reduces poverty rates for childless workers by a much smaller degree (0.14 percent for single workers and 1.39 percent for married couples). The EITC generally lifts households with children above the federal poverty line, but childless workers often remain below the poverty line even after the EITC.

In addition to differences in poverty reduction rates, there are also significant differences in tax rates between households with and without children that are otherwise “equivalent” (i.e. have the same income adjusted by household size). This disparity is due to the fact that the EITC is much more generous for households with children. While the 2015 maximum credit for a childless worker is $503, the maximum credit for a worker with one child is more than six times greater at $3,359.

These inequities provide a strong case for increasing the EITC for childless workers. Lawmakers have introduced bills in both the Senate (S.1012) and House of Representatives (H.R.902) that would increase the maximum credit for childless workers to $1,400 and lower the eligibility age for these workers from 25 to 21. CTJ estimates that this expansion would provide 10.6 million working individuals and couples without children with an average tax benefit of $604. President Obama and Rep. Paul Ryan have also both proposed increased benefits for childless workers, but would provide a maximum credit of only $1,000.

4. High EITC Error Rates May Be Due to Excessive Complexity

The EITC has been criticized for its high error rates relative to traditional spending programs and other benefits provided through the tax code, though there is evidence that a significant amount of error is due to complexity in eligibility rules and credit formulas. The report suggests that the concern about high error rates may be overblown, but a simplification of the credit has the potential to decrease error rates and confusion among taxpayers.

On the whole, evidence shows that the EITC is an important antipoverty program that has positive effects on employment. Policymakers should make permanent the ARRA improvements benefitting larger families and married couples, and can further improve on this program by increasing the credit for workers without children and simplifying the rules to increase the accuracy of claims.