Strategic Communications and Marketing News Bureau

How the Earned Income Tax Credit relieves poverty

April 15 is deadline day for filing federal tax returns, and therefore the day taxpayers love to hate. For many working Americans of low and moderate means, however, the tax system is the source for an annual income increase. Through the Earned Income Tax Credit (EITC), those who qualify can receive a tax refund beyond what they paid in federal income taxes – and last year 27 million Americans received more than $63 billion as a result, according to the IRS. Ruby Mendenhall, a professor of sociology and of African American studies at Illinois, has conducted several studies on the EITC. She also is leading a research team that will monitor the results of a Chicago pilot program, which will provide advance payments of the tax credit spread out over the year. She spoke with News Bureau social sciences editor Craig Chamberlain.

The EITC has become one of the nation’s largest antipoverty programs. How did that happen?

President Gerald Ford signed the EITC into law in 1975, almost four decades ago. President Obama, in this year’s State of the Union address, stated that the program “helps about half of all parents in America at some point in their life.”

The goal of the program is to offset income and payroll taxes for low-wage workers caring for children, thus preventing them from being taxed deeper into poverty. It was originally seen as a vehicle to fight poverty and to create incentives for employment, which facilitated its bipartisan support. This bipartisan support, and advocacy, has led to expansion over the years by both Democratic and Republican presidents.

The EITC fights poverty by supplementing the wages of low- and moderate-income workers. In 2012, it lifted 6.5 million people out of poverty, 3.3 million of them children. The EITC program is also viewed as a vehicle that benefits communities. Research shows that the higher wages are associated with boosting local economies and decreased crime rates.

Despite the bipartisan support, what have been the criticisms of the program?

Some critics say that the EITC does not do enough to support single workers without children. President Obama has addressed this in his FY2015 budget, which proposes doubling the maximum refund amount to $1,005 for childless workers and increasing age eligibility to 21-67 years.

On the other side of the debate are proposals to cut means-tested programs like the EITC in an effort to increase self-sufficiency and decrease dependence on the government. Critics also cite the substantial profits gained by for-profit tax preparers who charge EITC recipients high fees and interest rates for Rapid Anticipated Loans (RAL). In 2012, banks were prohibited from offering these loans for a fee.

How are EITC payments used by those receiving them, according to your research?

Because the EITC is sizable and is received once a year as part of an annual tax refund, it plays a unique role in the budgets of many families. My research shows that families use their EITC refunds to pay off old debt, pay current bills, buy groceries, repair or get new cars and buy items for the house.

For a smaller number of families, the EITC also provides an unusual opportunity to accumulate assets such as savings and a new house. I have also found that some families have asset accumulation goals that may take several years before they are realized. For example, some families discussed using their EITC to pay off old debt that would improve their credit scores one year. The next year, they planned to save their EITC to buy a house.

Are there ways the EITC could be improved?

In 2011, President Obama made two significant improvements to the EITC, which lifted about 500,000 people out of poverty and decreased the severity of poverty for about 10 million poor families. The first expansion decreased the financial penalty that some couples experience when they get married. So now married couples receive bigger refunds at higher income levels.

The second expansion involved an increase in the credit, up to $655 more, for families with three or more children. These larger families have higher rates of poverty than families with two children or less and the increase in credit helps them with their higher living costs. The EITC will also be improved by current efforts to expand benefits for childless adults.

How will the pilot EITC program in Chicago work? And what do you hope to learn from it?

The pilot program is a collaboration between the city of Chicago and the Center for Economic Progress, an organization that provides tax advice and other financial education and services for low-income families. The program will provide families with half of their EITC credit during the year, spread over four payments. We will examine if receiving advance EITC payments promotes families’ economic stability and their ability to accumulate assets.

How does this topic tie in with your other research interests?

A core belief of many Americans is that society should provide equal opportunities for social mobility. Unfortunately, researchers find that individuals on the bottom, or with the lowest incomes, face challenges moving upward. I am interested in the social mobility pathways used by low- and moderate-income families, like those receiving the EITC. I study how they use the EITC, and other mechanisms, to accumulate savings, attend school and purchase homes.

 

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