The Earned Income Tax Credit isn't super well-known, but it's one of the best tools the federal government has for fighting poverty. It functions as a wage subsidy for the working poor, providing an average of $2,982 a year to families with children come tax season. The results are impressive. According to the Census Bureau, refundable tax credits like the EITC and the similarly structured Child Tax Credit cut the poverty rate (correctly measured) by 3 percentage points in 2013 — that's 9.4 million people kept out of poverty.
But a new study suggests that even that is an underestimate. UC Berkeley economist Hilary Hoynes and the Treasury Department's Ankur Patel find that the EITC might be twice as effective at fighting poverty as the census estimate suggests.
The two ways EITC boosts poor people's incomes
Hoynes and Patel focus on the credit's effect on single women with children, the single biggest group of recipients. It's well-known that the EITC encourages nonworking single moms and dads to enter the workforce; an analysis by the Center on Budget and Policy Priorities found that EITC brought more single mothers into the workforce in the 1990s than welfare reform did. That means that it boosts income not just by giving people money, but by getting people to work more and bring in more in wages. These increased wages can reduce income in other ways, such as by making people ineligible for programs like food stamps, but on the whole it boosts pay.
Hoynes and Patel find that bringing this effect into the analysis doubles the number of people lifted out of poverty by the EITC. The expansion of the EITC included in Bill Clinton's 1993 budget reduced the share of people under the poverty line by 7.9 percent. That's much more than you'd find in an analysis that doesn't take the EITC's effect on employment into account.
The analysis comes with a caveat, however. Hoynes and Patel pinpoint one big weakness of EITC: It doesn't really do much for the poorest of the poor. "The EITC has an estimated zero effect on the share above poverty for those with income below 50% of the poverty threshold," they write. "This may reflect that the very lowest income groups have little attachment to the labor market." That suggests you need things like robust Social Security Disability Insurance and Supplemental Security Income and food stamps, which don't require recipients to work on top of EITC. It's an important program, but not the only one that matters.
It's not just the money
Outside of this study, there's a growing body of evidence showing the benefits of the EITC extend well beyond its effects on income.
In one paper, Hoynes, Douglas Miller, and David Simon found that the EITC significantly increases infant birth weight. A study by Notre Williams Evans and Craig Garthwaite found that the 1993 expansion reduced reports of high blood pressure and of biomarkers that predict stroke, heart attacks, and death. Economists Raj Chetty, John Friedman, and Jonah Rockoff found that the earned income and child credits significantly increase students' test scores, which in turn increases their odds of going to college, raises their earnings, and cuts teen birth rates.
EITC still won't get increased
So if EITC is good for earnings, and health, and education, why aren't we increasing it? In principle, both the White House and congressional Republicans want to. President Obama and House tax committee chair Paul Ryan have proposed almost identical plans to increase the EITC for workers without children, for whom benefits are currently quite slim.
But because Obama and Ryan both fund their plan in ways that are totally unacceptable to the other side, they haven't come to a deal to pass this plan. Obama would pay for the expansion by raising taxes on hedge fund managers and rich self-employed people, while Ryan would cut other safety net programs and "corporate welfare," which is this case means specifically energy subsidies the Obama administration likes. Ryan has explicitly rejected Obama's funding mechanism, and it's hard to imagine Obama accepting Ryan's.
Moreover, Ryan and other conservatives have not done much of anything to fight for the program in its current form. The 2009 stimulus package boosted the EITC for married couples and families with three or more children, and made the Child Tax Credit refundable for poor families. That provision expires in 2017, and the Obama administration has fought for it to be made permanent, including during high-profile disputes like last year's CRomnibus debate. But Ryan did not speak up in favor of making the provision permanent. Nor did Sens. Mike Lee (R-UT) and Marco Rubio (R-FL), both big boosters of refundable tax credits.
The EITC is hugely effective. But keeping it that effective, and making it more effective, requires congressional leaders to actually step up and fight for it. So far, they haven't.
Thanks to James Pethokoukis for pointing out the study.