Earned Income Tax Credit

This research examines the Earned Income Tax Credit (EITC). The overall objective of this examination is to assess the advantages and disadvantages of the EITC as a way of reducing income inequality within the United States. In this research, this overall objective is addressed through focusing on the effects of the EITC on (1) the levels of disposable money income of beneficiary families and (2) the incentives of beneficiary families to work.

The EITC was enacted in 1975 to "offset the impact of Social Security and Medicare taxes on low-income individuals and to encourage them to work instead of relying on welfare benefits" (Helping, 1994, p. 4). Originally, a family could receive no more than $400 under the plan. The program has been revised, and the General Accounting Office predicts an average credit of slightly more than $1,000 (Helping, 1994, p. 4). The EITC is an earnings subsidy rather than a guaranteed minimum income, which largely differentiates the EITC from the concept of a negative income tax (Alstott, 1994, p. 609).

In the mid-1980s, the total budgetary cost of the EITC was $2 billion, with 7 million families receiving benefits (Browning, 1995, p. 23). Budgetary costs are expected to reach about $25 billion by the late-1990sùa 12-fold increase over approximately 15 years, with 22 million families receiving benefits. This growth is "primarily a consequence of expan

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ly's income is to the breakeven level of the EITC. For families with incomes close to the breakeven income, the size of the credit is very small in relation to the family's total income. At $26,000 for a family with two children, for example, the credit is $210, or less than one percent of gross income. Thus, the income effect of the EITC that tends to increase disposable income becomes smaller the closer the family's income to the breakeven income. In contrast, the substitution effect (or, more precisely, the percentage change in the net wage rate that determines the size of the substitution effect) does not become smaller as income is closer to the breakeven level. At $26,000, for example, there is a 21 percent reduction in the net wage rate à, and that is the same percentage reduction as for all families in the phase-out range" (Browning, 1995, p. 27). The effects of the EITC in the phase-in and plateau ranges are different from those in the phase-out range (Browning, 1995, p. 36). In the phase-in range, the EITC acts to increase the net wage rate. This action "produces a substitution effect favorable to work effort and an income effect that reduces work effort. Although the net effect can, in theory, go either way, à
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Approximate Word count = 1719
Approximate Pages = 7 (250 words per page)

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