REPORT: How The Earned Income Tax Credit Boosts Work Levels And Education

Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.

A House subcommittee held a hearing today titled “How Welfare and Tax Benefits Can Discourage Work.” The clear subtext of the hearing is that negative work incentives can justify cuts to safety net programs and tax credits for the working poor — in other words, that such cuts can actually be good for affected families.

The House Republican budget, authored by Budget Committee Chairman Paul Ryan (R-WI), cuts low-income programs by $3.3 trillion over the next ten years. And by reducing tax credits for working parents, it raises taxes, on average, on households with incomes below $30,000.

A new report shows that these cuts are not justified by the supposed concern that tax credits discourage work. The report from the Center on Budget and Policy Priorities summarizes the economic literature on the Earned Income Tax Credit, one of the nation’s most important pro-work, anti-poverty programs. That literature indicates that the EITC increases work – not only among the parents who claim the credit but also their children, later in life. Among the important findings:

— “The overwhelming finding of the empirical literature is that the EITC has been especially successful at encouraging the employment of single parents, especially mothers.”

EITC expansions were more important than welfare reforms enacted in 1996 in increasing employment and decreasing cash welfare assistance among single mothers during the 1990s.

— While the EITC “induces substantially more workers to enter the labor force,” there is “little evidence that the phasing down of EITC benefits as income rises above certain levels causes workers to significantly reduce their work hours.”

As the report emphasizes, a growing body of literature also indicates that a critical aspect of tax credits like the EITC and CTC is increased educational achievement, income, and levels of work among the children of tax credit recipients. Recent studies have found:

The EITC and CTC (or similar programs that boost incomes among working parents) lead to large increases in students’ test scores and other indicators of educational achievement.

Tax credits increase the likelihood that children of working parents will attend college and raise their earnings as adults.

— Young children in low-income families whose incomes were boosted by $3,000 — a typical amount that a low-income family would receive from the EITC and CTC — earned an average of 17 percent more as adults and worked 135 hours more annually than similar children.

Researchers have also found that “means-tested” and social insurance programs, considered as a whole, have “a major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 percentage points in the U.S. population,” with that impact “only negligibly affected by work incentives.” The EITC alone lifted 6.6 million families last year.

Despite the success of the EITC and CTC in reducing poverty and encouraging work, House Republicans have already started trying to chip away at the tax credits. Their budget, authored by Rep. Paul Ryan (R-WI), reduces the EITC for families with three or more children and lowers the number of low-income families receiving the full benefit of the Child Tax Credit.

These cuts may be necessitated in the House Republican budget by massive tax cuts for the rich. But they are not justified by the supposed concern for work incentives among low-income working families.