The Earned Income Tax Credit (EITC) is a refundable tax credit offered by the US government to individuals and couples, especially those with children, who are on low, or medium, levels of income. A dual purpose tax credit, the tax credit is designed to offset federal income and payroll taxes, and also provide an incentive for those on a low income to continue working. Since its introduction, a number of states have set up EITC schemes, and these supplement the government tax credit.
The level of credit received depends upon several factors, including the claimant’s income and marital status, as well as the number of children the claimant has. Income levels vary from year to year but, according to the IRS, in the 2012 tax year, working families with incomes of up to $50,300 were eligible for EITC, depending upon the marital status of the couple claiming, and the size of the family.
The EITC is considered by many to have had a beneficial effect on the US economy, and has indeed encouraged many people to continue working or, if unemployed, to reenter the workforce. The fact that an individual’s tax credit increases as earnings increase, up to a prescribed maximum, means that individuals are encouraged to leave welfare for work or, if they are already in employment, to increase the number of hours they work each month.
Statistics clearly show that the EITC has been successful in tempting a significant number of single parents to opt out of welfare in favor of work. It is also said to have be the single most important factor in encouraging single mothers who had children to join the workforce in the 1990s.
The passage of the Recovery Act in 2009, boosted the EITC in two areas. Firstly, it increased the EITC for larger families, recognizing the fact that households with three or more dependent children faced an unusually high cost of living, and were more than twice as likely to be classified as poor. Secondly, it expanded cover to allow couples who marry to enjoy increased benefits at slightly higher income levels.
Opinions vary as to the effectiveness of the EITC, but most people would agree that lifting families with young children out of poverty is one of the most positive things that can be done to boost the future prospects for the children. Like many other government programs, the EITC has a direct budget cost, but the growing body of literature suggests that the social benefits derived from the EITC are well worth the cost of the scheme.