Americans who pay no income taxes, EITC edition

Earlier this summer, Sen. John Cornyn took to the Senate floor to rail against the 46 percent of Americans who pay no federal income taxes. “To show how out of whack things have gotten,” Cornyn (R-Tx.) said, “30 percent of American households actually made money from the tax system by way of refundable tax credits — the Earned Income Tax Credit, among others.” When he puts it that way, it sounds bad. People are leeching off the tax system?

But this turns out to be fairly misleading. A new study offers a more nuanced look at the role the Earned Income Tax Credit actually plays in the U.S. economy. The EITC, remember, is a refundable tax credit that helps supplement the income of poor employed workers with children. The formula’s a bit complicated, but a worker with two kids making $16,000 a year can get up to $5,036 back in taxes. As it turns out, a stunningly large number of Americans use the program.

“Approximately half of all taxpayers with children used the EITC at least once [between 1989 and 2006],” writes Indivar Dutta-Gupta of the Center on Budget and Policy Priorities. Most EITC beneficiaries only use it for a year or two, before scrambling up the income ladder. Workers were especially likely to use the EITC when their kids were very young. By and large, the program helps many workers get ahead, and it alleviates early-childhood poverty. You can see why it’s been so popular for so long among both parties — Ronald Reagan, for one, called it “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.”

And here’s the kicker. Contrary to what Cornyn’s suggesting, EITC beneficiaries don’t seem to be drains on the tax system. In the long run, they pay more in taxes than they receive in benefits. Here’s Indivar Dutta-Gupta again: “Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period.” It’s a little misleading to look at a single year, note that large numbers of people aren’t paying income taxes, and assume that they’re not paying their fair share. If programs like the EITC are helping people get richer, it can mean more tax revenue in the long term.