Is the Earned Income Credit good tax policy?

By Stew

While filing my taxes a couple of weeks ago, I notices that the EIC or Earned Income Credit was a major factor in reducing the amount of tax that I owed and greatly increasing the amount of my refund. I have usually assumed that the EIC was simply a liberal-socialist attempt at wealth redistribution and even though I benefit from the policy, I generally voiced opposition to this particular idea because I thought it was a handout and undermined free market principles. However, I started to do a little research into the history of the EIC, I began to realize that this policy gets nearly universal support from both sides of the political spectrum.

Conservative Republican, Ronald Reagan was one of the first supporters of the policy all the way back in 1972 while governor of California. On the federal level, the EIC has roots in the Nixon presidency when it was first championed by a democrat from Louisiana by the name of Russell Long. Reagan and both Bush presidents oversaw increases in the earned income credit during their terms. Left-leaning President Clinton increased the EIC in 1993 and President Obama’s American Reinvestment Act also expanded the credit . The idea has received bipartisan support throughout its history with legislative changes taking places in 1975, 1984, 1986, 1990, 1993 and 2009.

The left likes the EIC mostly because it does give money to the working poor, one of their key constituencies. The right tends to like the EIC because it effectively works like a tax cut – putting money in people’s pockets with no strings attached. They can save or spend the money on whatever they like, making it market-friendly policy. The EIC has been part of our tax code for over 30 years and it shows no signs of going away, not just because both parties support it, but because nearly all studies are starting to show that the EIC is one of the few “entitlement” programs that actually does help people and motivate them to work. In fact, the EIC is credited with reducing unemployment among single mothers. It was especially interesting to learn that employment of single mothers with children has outpaced the employment levels of single women without children since the 1980′s.  Studies for this phenomenon have given credit to EIC legislation. Studies have also shown that the EIC has provided incentive for over 6 million people to move out of poverty by finding work. The studies that I read from both the right and the left seemed to universally agree that the EIC is good policy.

Here are the qualifications for the Earned Income Tax Credit:

  • Must have a valid Social Security Number
  • You must have earned income from employment or from self-employment.
  • Your filing status cannot be married, filing separately.
  • You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
  • You cannot be a qualifying child of another person.
  • If you do not have a qualifying child, you must:  be age 25 but under 65 at the end of the year, live in the United States for more than half the year, and not qualify as a dependent of another person.
  • Cannot file Form 2555 or 2555-EZ that are related to foreign earn income
  • You must meet these EIC Income Limits

The two most basic components of the law are the presence of earned income and the presence of dependent children. A few years back, I made a mistake on a less well-known part of the law when I exceeded the maximum allowable amount of “interest income” by $20 and had to pay a tax penalty. For tax year 2011, the limit on this type of income is $3,150 and most people who qualify for the EIC will earn nowhere close to that amount of money via interest.

The stated purpose of the EIC is to offset the burden that payroll taxes (Social Security, Medicare, etc.) place on families who earn low to medium income. The EIC was also intended to provide motivation for lower income earners to find and hold a job. I think that the evidence is pretty clear that the EIC is at least one US federal government initiative that is fulfilling its purpose. Also, since the Stew household includes three children and basically one income, we qualify for this credit nearly every year. In the past, I used be apologetic about taking this money since I did not earn it, but after finding out that this policy is a net positive for our economy, I am not going to worry about it anymore. There are times when I am concerned about how much longer our government can afford to give away thousands of dollars, but that is a different issue and I am not going to be the one who refuses a little extra cash every spring.

 seanmcmenemy

 


5 Responses (including trackbacks) to “Is the Earned Income Credit good tax policy?”

  1. Bill Says:

    I am not sure what a single mother without children really is….

  2. Stew Says:

    oops. :) good catch. noted and changed

  3. Jonathan Says:

    Wow, a really really helpful look at this topic EIC is a complex area for most people, but talking about it in this way really helps regular readers to your blog to understand the key issues. Thanks for making a complex topic simple.

  4. Carl Says:

    26 million taxpayers used the EIC in 2010 and it has been been reported that over 6 million did not take advantage of this so called “tax credit”. IRS has become the new handout among US citizens with help from legislation of the EIC and child tax credits. I helped file my daughters return this year. She and my son-in-law earned $23,000 and payed $1400 in federal income tax. After filing she was due $5300. A gain of $3900. In essence she is getting paid by the government. Every income earner should pay federal taxes to enable the federal government to run as well as to fund federal programs. How is this going to succeed if tax revenues are being depleted by these tax policies? Not to mention how will we be able to pay for our National Debt of nearly 14 trillion. On the other hand the EIC does encourage people to work if they know about it. The problem lies that the EIC should help reduce ones federal tax bill not be a handout for many workers.

  5. Brian Says:

    The real problem I have with the credit was started when it became a refundable credit. It is creating a generation of people who think they deserve this refund, and ignore their responsibility to contribute to the betterment of society. They vote for who will give them money they somehow ‘deserve’ rather than for a responsible spender of the money.

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