The Earned Income Tax Credit

• DOI: 10.1177/0002716219881621
• Published date: 01 November 2019
• Date: 01 November 2019
• Subject Matter: Means-Tested Transfer Programs

881621ANN
The Annals of The American AcademyThe Earned Income Tax Credit
research-article2019
In this article, I review the most prominent provision of
the federal income tax code that targets low-income tax
filers, the Earned Income Tax Credit (EITC), as well as
the structurally similar Child Tax Credit and Additional
Child Tax Credit. I discuss the programs’ goals: distri-
butional, promoting work, and limiting administrative
and compliance costs. The article reviews the history of
the programs, the predicted economic effects, and
what is known about program impacts and distribu-
The Earned tional consequences. I conclude that the EITC effec-
tively targets low-income households and is efficient in
Income Tax reducing poverty while encouraging work and that
increases in after-tax household incomes lead to
improved outcomes over the life course for children of
Credit
those households. I propose reforms to the program,
including policies that expand the generosity of the
credit and increase take-up, as well as structural
reforms that include spreading benefits throughout the
year and reducing reliance on paid tax preparers.
Keywords: safety net; poverty; labor supply; tax credits
By
HILAry HOyNES
Entitlements operate not only through the
transfer system, such as food stamps, social
security, and disability benefits, but also through
the tax system. The most prominent provisions
Hilary Hoynes is a professor of economics and public
policy and the Haas Distinguished Chair in Economic
Disparities at the University of California, Berkeley,
where she also codirects the Berkeley Opportunity Lab.
She is a member of the American Academy of Arts and
Sciences, the National Academy of Social Insurance,
and is a fellow of the Society of Labor Economists.
NOTE: I thank Janet Holtzblatt, Elaine Maag, and the
Center for Budget and Policy Priorities EITC team for
discussions about policy reform and Krista ruffini for
excellent research assistance. The article draws heavily
from my prior reviews including Eissa and Hoynes
(2006a, 2006b); Hoynes and rothstein (2017); and
Hoynes, rothstein, and ruffini (2018). I thank these
coauthors for the many useful discussions on these
issues.
Correspondence: hoynes@berkeley.edu
DOI: 10.1177/0002716219881621
180
ANNALS, AAPSS, 686, November 2019

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THE EArNED INCOME TAx CrEDIT
181
of the federal income tax code that target low-income tax filers are the Earned
Income Tax Credit (EITC), the less prominent Child Tax Credit (CTC), and the
Additional Child Tax Credit (ACTC). These programs are explicitly redistribu-
tive, designed to transfer money to families and individuals rather than tax it away
from them.
The EITC is a tax credit available to lower-income families and individuals with
positive earned income. The credit operates as an earnings subsidy at low levels of
income (in the phase-in region), reaches a maximum credit amount, and then is
phased out at higher income levels. For example, a family with two children earn-
ing less than $14,290 will receive 40 cents for every dollar earned up to a maximum
of $5,716 (in 2018). For a single parent with two children, the credit is phased out
at incomes between $18,660 and $45,802. The credit is refundable; therefore, if
recipients’ tax obligations are below the credit amount, they receive refund checks
from the Internal revenue Service (IrS). In 2016, 86 percent of the total tax
expenditure of the EITC took the form of tax refunds (IrS 2018b, Table 2.5).
The EITC was introduced in 1975 as a modest tax credit to offset payroll taxes
for those with low earnings. Expansions beginning in 1986 and continuing in the
1990s and 2000s have transformed the EITC into a central element of the U.S.
social safety net for families with children (Bitler and Hoynes 2010; Hoynes and
Schanzenbach 2018). While the EITC is available to all low-income wage earn-
ers, the tax credit is much more generous for families with children, reflecting
the potential for intergenerational benefits (Hoynes and Schanzenbach 2018;
Hendren and Sprung-Keyser 2019). In 2016, the EITC reached 27 million tax
filers at a total cost of $67 billion. Almost 20 percent of all tax filers and 44 per-
cent of filers with children receive the credit. The maximum credit in 2018 was
$6,431 for families with three children, $5,716 for those with two children,
$3,461 for those with one child, and $519 for those without children—this can be
as much as 45 percent of a family’s pretax income. Overall, the average credit
amount for families with children is a substantial $3,200 (IrS 2018a). The pro-
gram dwarfs traditional cash welfare (Temporary Assistance for Needy Families,
or TANF), which reached only 1.2 million families in fiscal year 2018, a more
than 75 percent decline since 1994.
The CTC is more recent; it has been available in the United States since 1997.
The CTC is similar to the EITC (e.g., a phase-in, maximum credit, and phase-out
regions), with a maximum credit of $2,000 per child under current law (up from
$1,000 from 2003 to 2017). However, the CTC is much less targeted compared
to the EITC, as eligibility extends very high into the income distribution (phase-
out of the credit begins at $200,000 for single parents and $400,000 for married
couples). Additionally, unlike the EITC, it is not fully refundable, and thus the
lowest-income families do not gain fully from the credit. The refundable compo-
nent of the CTC—the ACTC—requires $2,500 in earnings, is phased in slowly,
and is capped at $1,400. In 2016, the cost of the CTC was $52 billion, on par with
the EITC. After the 2018 expansion, the CTC’s cost will likely far exceed that of
the EITC.
What are the goals of these two tax credits? First, all means-tested programs
are designed in part to achieve distributional objectives. In the case of the EITC

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THE ANNALS OF THE AMErICAN ACADEMy
(and the ACTC), these are to transfer funds to low- and moderate-income fami-
lies, and particularly to those with children. The nonrefundable CTC distributes
to families with children, but is not income targeted, given the eligibility up to
the highest income percentiles. The CTC then may be better thought of as a
near-universal (excluding the lowest earning and highest earning families) child
benefit for working families. Second, the EITC is explicitly designed to encour-
age work. Third, by administering this benefit through the tax system, adminis-
trative costs associated with transfer programs are reduced.
In this article, I review the role of the EITC, what is known about its impacts
and distributional consequences, and the possibilities for reform. I give less
attention to the CTC given its less important role for lower-income families with
children and the limited evidence on the behavioral effects of the credit.
I begin in the next section by reviewing the structure and history of in-work
tax credits. Then, I discuss the economics of the EITC and briefly review the
evidence from the research on the effectiveness of the EITC. The next section
discusses possible reforms to the EITC, and I end with a concluding section that
illustrates how the EITC has met its stated goals to date and possible reforms to
improve on the program.
Current Policies and recent reforms
To be eligible for the EITC, a taxpayer—or tax filing unit—must have earned
income during the tax year. The value of the credit is determined by a benefit
schedule with three regions, known as the phase-in, flat, and phase-out. In the
phase-in region, the credit increases by a share of each additional dollar earned.
Once the credit reaches its maximum value, the taxpayer is in the second, flat
region, where additional earnings do not affect the credit value. In the final
region, the credit declines with each additional dollar of earnings (or, adjusted
gross income [AGI], if that is higher) until it is zero.
The exact parameters of the schedule vary by filing status and by the number
of qualifying children. The qualifying children definition for the EITC is com-
plicated, occupying seven dense pages in IrS Form 596.1 Figure 1 displays the
EITC schedule in 2018 as a function of earned income for single taxpayers with
zero, one, two, and three or more children. For families with children, the
phase-in or subsidy rate is substantial at 34/40/45 percent for those with one/
two/three or more children. The phase-out rate is modest, at 15.98 (21.06)
percent for those with one (two or more) children. Maximum benefits range
from $3,461 for families with one child to $6,431 for those with three or more.
Eligibility for single taxpayers extends to incomes of $40,320 (with one child),
$45,802 (with two children), or $49,194 (with three or more children). The
credit for families without children is much less generous, with a phase-in
rate of 7.65, a maximum credit of $519, and a maximum allowable income of
$15,270. The dashed lines in Figure 1 denote the extended flat and phase-out
regions for married couples ($5,680 in 2018) receiving the EITC.2

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THE EArNED INCOME TAx CrEDIT
183
FIGUrE 1
Earned Income Tax Credit Schedule, 2018
Tax credit (2018 $)
7,000
3+ Children
6,000
5,000
2 Children
4,000
1 Child
3,000
2,000
1,000
No Children
0
0
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000
Earnings (2018$)
SOUrCE: Internal revenue Service, revenue Procedure...