Tax Credits for Working Families: Provisions for Equity & Opportunity

Bradley Hardy, Georgetown University

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D.C. Tax Revision Commission

January 19, 2023

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The Earned Income Tax Credit (EITC)�

The EITC:

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1. supplements wages for many U.S. workers
2. reduces poverty & Black-White income inequality in the U.S.
3. provide benefits that can mask deeper inequality related to joblessness

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Background on the EITC

• Federal Earned Income Tax Credit
• Means-tested
• Refundable annual tax credit
• Target population is workers with low income
• A wage subsidy operating through the tax code
• Efficiency: Administration via IRS
• One lump-sum payment in the spring
• Advance payments (ended in 2011)

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Background on the EITC

• Federal credit supplements anywhere from $.08 to $.45 for every dollar earned up to a maximum threshold
• Largest cash transfer to families with low income
• 29 states offer supplemental EITCs (4 are nonrefundable)
• DC: 70% match to federal EITC in 2022
• Almost $12,000 for some households
• American Rescue Plan expanded EITC in TY 2021

Urban Institute (2022)

Background on EITC

• EITC promotes
• employment by subsidizing wages (Bollinger et al. 2009; Chetty et al. 2012; Eissa & Hoynes 2006; Schanzenbach & Strain 2021)
• higher net income
• improved educational outcomes (Dahl & Lochner 2012)
• Federal EITC, child tax credit, and child and dependent care credit lifted almost 10 million people above poverty in 2021
• How is the money used?
• Repairs, credit cars, back payments (Tach & Halpern-Meekin 2014)

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2021 Poverty Reduction (U.S. Census)

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The EITC and Black-White Income Inequality

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• Black-White income inequality stands as among the most durable group level outcome differences in the U.S.
• Large negative consequences to growing up in low income households (e.g. Duncan et al. 2010)
• Lowered subsequent educational attainment
• Diminished health status
• Lower income in adulthood
• Question: How might the EITC affect inequality in the middle of the distribution versus the bottom of the distribution?

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The EITC and Black-White Income Inequality

Hardy, B., Hokayem, C., & Ziliak, J. P. (2022). Income inequality, race, and the EITC. National Tax Journal, 75(1), 149-167.

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• EITC lowers inequality by 5-10 percent in a typical year
• EITC is associated with lowering Black-White income gap at the median and 25^th percentile, particularly after expansion in early 1990s
• EITC has no impact on Black-White income gap at the 10^th percentile
• EITC 1993 expansion had a larger employment effect for Black households than White households

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Overall Inequality: P50-25 & P25-10

• P50-25 inequality trends before and after accounting for federal + state EITC
• EITC reduces P50-25 ratio at an increasing rate from mid-1980s onward by roughly 10 percent
• EITC is associated with large reductions in P25-10 inequality
• Especially after TRA 1986, OBRA 1993
• Post-Great recession reduction in the the level of post-EITC inequality
• Pre-post EITC gap falls as well

Racial Inequality Across the Distribution

• EITC reduces racial income inequality at 25^th and 50^th percentiles
• Inequality is reduced by 10 percent in 2005 at the 25^th percentile (largest reduction)
• Lower levels of inequality reduction at the 50^th percentile
• Group income differences leave a larger share of Black households eligible for the EITC at the 50^th percentile
• 10^th percentile of Black-White pre and post-EITC distribution reveals no substantive reduction in racial inequality
• Note: comparing group income distributions

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What’s potentially driving this? �Employment Across the Income Distribution and Race

• Black employment at the 10^th and 25^th percentiles of the income distribution rises by 74 and 30 percent between 1995 and 2000
• Co-occurring with policy expansions to the EITC, economic growth, and policy changes to cash welfare
• Potentially important mechanism driving racial income inequality
• Large differences in employment imply that the conditional nature of EITC receipt likely excludes many Black households

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Effect of EITC on Employment

• We find strong evidence of employment effect from EITC across race
• Employment response for Black individuals is, on average, 3 times larger than for Whites
• Baseline employment rates are 10 percentage points lower (64 percent Black, 74 percent White)
• Stronger response for Black women, twice as large as that of White women

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Summary of Findings

• Racial inequality is reduced for households at the 25^th and 50^th percentiles of the distribution
• Driven by racial gaps in extensive-margin employment across race
• In response to the 1993 expansion
• For households at the 10^th percentile, the EITC yields no improvement in the Black-White income gap
• Important that DC leads the way with an aggressive supplemental EITC program

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Conclusion and Policy Implications

• The EITC provides more support for the near-poor, and less support for families experiencing deep poverty
• Work participation as a pre-condition of receipt may operate as a barrier for some families
• Black families face a range of historical and current-day structural barriers to work and economic opportunity; diminished labor market networks, explicit labor market discrimination, higher incarceration rates (Western and Petitt 2010)
• More targeted income support policies may be required to assist families experiencing deep poverty

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Ideas for DC Tax Revision Commission

• Addressing challenges in promoting take-up of refundable tax credit
• Complexity of tax code
• Filing among workers with little-to-no tax burden
• Age restrictions on receipt
• Employment gaps limit reach of the EITC
• Programs like fully refundable CTC independent of work status can be effective
• Packaged with on-going efforts through DC TANF & other policies

blh5@georgetown.edu

@bl_hardy