In the United States, poverty has been an ongoing issue and many low income families are struggling to survive. As time goes on, inflation rises and pandemics also arise, which is why it's important for safety nets to be there to help those in need. There have been many programs implemented in order to help, such as SNAP, affordable housing, WIC, free or reduced cost school lunches, supplemental security income (SSI), and many more. I will be discussing one of the major programs implemented to reduce poverty, the tax expenditure policy to give more money to households who are working with low incomes named the “Earned Income Tax Credit (EITC).”
The earned income tax credit program is a way to help working people who have low income by reducing the amount of taxes owed, which can lead to them getting refunds instead of paying income taxes. In order to qualify, some requirements for this program are: a valid social security number or ITIN, be at least 25 years old if you haven’t any children in your household, be a U.S Citizen or legal U.S. resident, and have an earned income coming in (but it must be below a threshold—which was $63,298 for tax year 2023). When it comes to determining the amount of the EITC people would attain, this involves a formula and depends on income, filing status, and the number of children if you have a family. For example, according to Illinois Department of Revenue, the maximum income you can earn to qualify if you are a single person or head of a household without children or other dependents would be $17,640. For example, if you have no kids and are single, and you earn less than $17,640, you probably qualify. If you are married and file jointly, but have no children or dependents, you qualify if you earn less than $24,210. The EITC goes up when you have children; a single parent with one child would usually get an EITC if their income was below $46,560, and if the household was a married couple filing jointly with one dependent they would qualify with an income under $53,120. For two children, single parents qualify at $52,918 and married couples qualify under $59,478. Lastly, for three children or more, it would be $56,838 if you're single and $63,398 if you're married. These are all figures for tax year 2023, but the limits rise every year.
The EITC is a refundable credit. This means if your household had a benefit of $3,995 (the maximum benefit for a household with one child/dependent), and your tax owed to the IRS was $950 (before tax credits figure in), and your workplace had withheld $1,200 from your paycheck over the year, you wouldn’t just get back the $250 you had overpaid. Instead, the $3,995 refundable credit would wipe out the $950 debt and further credit you $3,045 (your $3,995 EITC benefit minus your federal income taxes), and since you had already paid $1,200 in federal income tax withholding, you would get all that back as well. So, you would get a refund from the EITC of $4,245 (a refund of the federal tax withholding plus the $3,045 net EITC benefit after subtracting the federal tax you would have otherwise paid if you hadn’t applied for the EITC). On top of the federal EITC, some states have state EITC benefits, and some families can also get a refundable child tax credit along with their EITC benefit. For families qualifying for a maximum EITC benefit (generally earning around $20,000, give or take a few thousand, depending upon the size of the family and the number of dependents under age 18), the EITC benefit can be substantial. For a family with three children, the EITC benefit in 2024 (for tax year 2023) could be as high as $7,430.
The EITC is a popular tool for fighting poverty among working families, and it most likely will continue to stay. Benefits increase as an income increase from $1 up to the maximum benefit levels $1, so as a part-time worker or low hourly-wage worker works more hours, their benefit increases more and more. This creates an incentive for part-time and low-wage workers to get involved in the labor market and stay employed. In essence, the EITC allows the American public to subsidize employers and companies that hire part-time workers or low-wage workers, allowing those businesses to pay lower wages, since the EITC will supplement their low wages with additional money to help a family survive.
One of the first benefits many receive from this program is helping reduce poverty. Census data has shown that in 2018, 5.6 million people have been lifted above the poverty line due to the help of the extra money given as refund of their taxes (according to the Center on Budget and Policy Priorities). According to some of the research charts,10.6 million people have been lifted from the poverty line in 2019 by the EITC. Another 17.5 million people still struggle with poverty, but the EITC made their poverty less severe. Not only does the program help families struggle less with money, but this will help children's overall mental and physical well being. Poverty causes stresses in a family that harm children. However, as the EITC reduces family stress and panic in the face of economic hardship, this allows children to focus in school without having the worry of their household struggling to avoid eviction or hunger. Since the children will be more focused in school, this will help them achieve greater success in life and have better opportunities to grow wealth. All the programs that reduce the stresses of poverty by lifting consumption in low-income families to levels above poverty are beneficial for the mental and physical well-being of young Americans, whether the benefits are SNAP and free school lunches, Medicaid, or the EITC, but the EITC is one of the largest of these programs with a correspondingly large impact on national well-being. It is very important to realize that stress can have immense effects on everyone, and people who face daily stressors are low income households. Trying to survive by living paycheck to paycheck is an ultimate life stressor that cannot be escaped. Some physical/mental effects of poverty stressors would be increased chances of depression, higher level of chronic diseases, and lower average life spans. Some social problems that could arise would be transfer of stress from parent to children, less time to bond with family, lower emotional well being, poorer executive decision-making, more externalizing mental health problems such as substance abuse, and less life satisfaction. Anything that fights poverty reduces these undesirable harms inflicted on persons experiencing poverty.
Another benefit of continuing and applying for the EITC would be that it provides more for those who are working and creates an increased supply of labor. It is an incentive promoting more people to work, which also overall helps run the economy. Many skeptics of welfare policies usually argue that programs will lead to a decrease of employment and people will take advantage of the help given by the government in a way that reduces their willingness to accept employment, but with this program, you need to be able to earn income in order to be able to qualify for the tax credit refund. Having an increase in employment can also lead to higher earnings that can help them get out from below the poverty line and hopefully continue to grow into more wealth over time so their families can continue to remain out of poverty as the children grow into adults.
Now, some concerns about the EITC involve the difficulty of keeping track and making sure that each application is valid and there is no fraud being done. According to the Tax Foundation, EITC has a high error rate, imposes a marriage penalty, and discourages work past a certain threshold. That is, once a household’s income goes past the level where that household earns the maximum benefit, for every dollar in increased income the family earns, the EITC decreases. As the EITC decreases, the increased income also will increase the income taxes owed, so the decrease can be fairly sharp. A family earning $22,000 and gaining the maximum EITC benefit might not want to significantly increase hours worked or take a promotion if the resulting $8,000 income increase triggered an increase in taxes of $960 and a decrease in EITC benefits of $1,200 and a decrease in SNAP benefits of $840 for a net income after-tax-and-transfer consumption increase of only $5,000.
The program's complexity makes it hard to navigate and determine if the money is going to those who are actually in need. Also, by design the EITC’s incentive to increase income means that it does little to help the poorest of the poor who have no income or extremely low incomes, and does more to help families that are just a little below the poverty threshold. All of these cons are valid but potentially specific jobs can be created with the IRS to help administer and overview applications and verify that they are valid, which can boost the economy with the new jobs opening. It is also understandable to see the marriage penalty since you are joining both accounts, it can disqualify you from entering the program and although many families meet a certain income criteria, they are still in need of the extra cash to help get by. Some reforms that could be done to help with the drawbacks of the program could be simplifying the eligibility rules and making sure to specify certain rules on children dependents.When it comes to the marriage penalty, it would be worthwhile to eliminate the marriage penalty completely. That is, currently two single parents, each earning about $20,000 with one child dependent get married, they would become a married couple family with two children dependents and an income of about $40,000, but their EITC (for the single household) would be less than the combined value of the EITC benefits the households had collected before marriage. It should be simple to adjust income thresholds and tables of benefit rates so that the tax system would stop penalizing people for marrying and merging their households.
No program is perfect, which is why it's crucial to address concerns and reform our policies by focusing on its effectiveness and shortcomings. The EITC is one of the more popular programs, but it could be improved by addressing the problems with it.
The Earned Income Tax Credit has recently (in 2021, for tax year 2020) given out about $3,100 on average to qualifying families with children. The Congressional Research Service reports that in 2021, “26.0 million taxpayers (16% of all taxpayers filing an individual income tax return) received a total of $59 billion from the EITC, making the credit the largest need-tested antipoverty program that provides cash benefits.”
Overall, the Earned Income Tax Credit program plays a critical role in reducing economic inequality, promoting employment and helping support low income families by giving them a safety net in case their income is not enough to live in this economy. It is a great way to promote hard work while also handing out extra cash for those in need. Studies have already shown many improvements and with the help of reforming the current policies and making programs even better by addressing its issues that were not seen before, our society can then grow and increase the wealth of our economy exponentially.
https://tax.illinois.gov/programs/eitc/max-income.html
https://www.cbpp.org/research/policy-basics-the-earned-income-tax-credit
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