Earned income tax credit
From Academic Kids
The United States federal earned income tax credit is a refundable tax credit that supplements the earnings of low- and moderate-income workers. Enacted in 1975, the EITC was expanded in 1986, 1990, and 1993.
The earned income tax credit (EITC) is the largest, and arguably the most effective, poverty reduction program in the country. It is a special tax benefit designed to improve the financial situation of people who work but earn low wages. The credit is in part intended to offset other taxes that low-income workers pay, such as payroll (social security) taxes and Medicare taxes. Almost 21 million families received more than 36 billion dollars in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line.
Millions of families who are eligible for the tax credit do not receive it, leaving billions of additional tax credit dollars uncollected. Research by the General Accounting Office (GAO) and IRS indicates that between 15% and 25% of households who have earned the EITC do not claim their credit.
Using the most conservative of these figures would mean that more than 3.5 million (3,689,582) households nationwide missed out on the EITC dollars they were entitled to. If the actual portion of eligible families who do not collect the credit is 25%, then almost 7 million (6,969,116) eligible households did not claim the credit.
The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion ($6,515,801,812), or more than $12 billion ($12,307,458,856) if the unclaimed rate is 25%.
Economists suggest that every increased dollar received by low and moderate-income families has a multiplier effect of between 1.5 to 2 times the original amount, in terms of its impact on the local economy and how much money is spent in and around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively losing as much as $18.4 billion.
- New Research Findings on the Effects of the Earned Income Tax Credit, Center on Budget and Policy Priorities, March 11, 1998 (http://www.cbpp.org/311eitc.htm)