How paying no federal income taxes helps the poor get off welfare and into work

September 18, 2012

Why don't 47 percent of Americans pay federal income taxes? One major reason: Tax credits that were passed with major bipartisan support — namely the Earned Income Tax Credit and the Child Tax Credit. And there's a wealth of research showing that both of these tax breaks have been effective at lifting these Americans out of poverty and encourage them to move from welfare to work.


Job-seekers stand in line during a job fair in Portland, Oregon. (Rick Bowmer/AP)

The Earned Income Tax Credit, in particular, was created to encourage low-income people to work, diverting government resources from handouts toward incentives built into the tax code. That's why Reagan expanded the tax break — which was created in 1975 — and Clinton used its expansion to complement welfare reform, with full support from Congressional Republicans.

There's significant evidence that it's been successful in doing so. “[T]he overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers,” according to economists Nada Eissa and Hilary Hoynes, in a 2005 study cited by the Center on Budget Priorities.

Another study by University of Chicago economist Jeffrey Grogger found that the expansions of the EITC during the Clinton years “appear to be the most important single factor in explaining why female family heads [of households] increased their employment over 1993-1999" — helping to increase single mothers' employment and decrease the welfare rolls, perhaps even more than Clinton's 1996 welfare reform law, the CBPP continues. Altogether, "expansions of the EITC in the 1990s induced more than a half a million families to move from cash welfare assistance to work, according to research by economists Stacy Dickert of Michigan State University, Scott Houser of the Colorado School of Mines and John Karl Scholz of the University of Wisconsin-Madison."

What's more, the EITC has also been an effective stepping stone from low-wage to higher-paid work, according to a 2009 study co-authored by economists from Congressional Budget Office and the University of Wisconsin-Madison: "The EITC encourages work among single mothers, and that work continues to pay off through future increases in earnings."

Aside from the Earned Income Tax Credit, other tax breaks have been effective at boosting future achievement while helping families out of poverty in the present. The Child Tax Credit, for example, was created in 1997 by a Republican-led Congress and a Democratic White House, and expanded under both the Bush and Obama administrations. It isn't solely targeted to lower-income families: It phases out at $110,000 for married couples.

But it has an outsized impact on reducing tax liability for lower-income families. In 2011, the Child Tax Credit lifted 1.6 million children above the poverty line and 2.9 million people overall, according to the CBPP. (The Earned Income Tax Credit similarly lifted 6.3 million Americans above the poverty line, including 3.3 million children.) And as with the EITC, there's a significant body of research linking Child Tax Credit to higher achievement.

For example, one 2011 study from Harvard and Columbia University economists examined the impact of both the EITC and CTC on low-income families. "We find that a $1,000 increase in tax credits raises students’ test scores by 6 percent of a standard deviation, using our most conservative specification," the authors write in the study. "We show that higher scores increase students’ probability of college attendance, raise earnings, reduce teenage birth rates, and improve the quality of the neighborhood in which their students live in adulthood."

That's not to say there aren't potential problems with the tax credits: "Critics complain that the EITC is too complex. ... The credit’s complexity may also contribute to its relatively high error rate," the Tax Policy Center notes. But overall, these tax credits have not only proven to help families out of poverty, but also encourage them to become more self-sufficient in the process. Which is why, until now, Republicans have been such fans of them.

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