New Study Gets It Wrong about the EITC
Despite the impressive track record of the Earned Income Tax Credit (EITC) in decreasing poverty, improving progressivity, and encouraging work, it has recently been under attack. The Tax Foundation just released a study that explains the “benefits” of eliminating the EITC. It can be easy to get caught up in the rhetoric because arguing tax policy can be confusing, but there are a few notable flaws in the study.
The paper claims that by eliminating the EITC, people would work more hours. From a strictly theoretical perspective, this is true. Once a person is in the “phase out” period of the EITC (after a certain point, as a worker earns more income, his/her EITC begins to decrease), there is an economic theory that suggests they have an incentive to reduce or keep hours constant. C. Eugene Steuerle of the Urban Institute, in testimony before the House Ways and Means Committee in June, said “Work subsidies such as the EITC generally encourage work for those who might otherwise not work or simply reside on welfare, but may tend to discourage work at higher income levels, particularly for second jobs in a family or moving to full time work.” There are many assumptions at play here. We assume that low-income heads of households are sitting around plotting their marginal tax rate and working the number of hours that they calculate to be the best rate. This is fairly unrealistic. In fact, a 2000 study found although most families had heard of the EITC, most did not know that they needed to earn a certain amount in order to maximize their credit.