A Majority of Those Who Claim EITC Are on it for Less Than Two Years

May 2, 2012Mike Konczal

Here's a datapoint I was surprised to learn. From a footnote by Bob Greenstein of CBPP, there's a paper titled Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support, by Tim Dowd and John B. Horowitz.

Is the safety net a hammock?  And is the system fundamentally broken if some 40 percent of American don't pay an income tax? This is the brunt of the conservative attack on the welfare state.  As Paul Ryan notes, his plan will make sure the government doesn't "turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives." Ryan's plan is focused on cutting spending through the tax code.  Most tax code spending benefits the top 20 percent of Americans, with one exception - the set of refundable credits including the Earned Income Tax Credit (EITC).  Those mostly go to those in the bottom 40 percent of Americans.  If you have the concerns mentioned above, the EITC is the place you'd cut.

But does the EITC represent a "hammock," a permanent class of the poor living lives of "depenency and complacency"?  For one, EITC is connected to those who work, so one would think that it would be excluded from the assault on the welfare state.  But beyond that, it appears that those claiming EITC are people going in and out of working poverty with a surprising turnover frequency.  From the Dowd/Horowitz paper (my bold):

Sixty-one percent have spells of one or 2 years. However, at the same time, we find that 20 percent of EITC recipients starting a spell, conditional on observing the taxpayer in 1989, claim the credit 5 or more years. Therefore, for some taxpayers, the EITC acts as a temporary safety net during periods of either anticipated or unanticipated income or family structure shocks. But the EITC also acts as a long-term mechanism of providing assistance to taxpayers with children who are entrenched in the lowest- income brackets.

Indivar Dutta-Gupta at CBPP has more on the study, also noting that (my bold):

The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  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, after subtracting the EITC and any other refunds.

Dowd and Horowitz’s new study also found that EITC use is highest when children are youngest — which is also when parents’ wages are lowest.  (Working parents’ wages rise, on average, as their children grow up.)  This finding is particularly important given the importance of income for young children’s learning and the evidence that poverty in early childhood may reduce children’s earnings as adults.

Rather than a permanent class of non-taxpayers, EITC users do, in fact, pay more in federal taxes over time than they get in EITC benefits, which represents how many of them move in and out of working poverty over the course of several years.  The study finds that mobility is lower on the whole for this group, which makes a safety net even more of a necessary thing.  But perhaps we can cut with the hammock language, and focus on the metaphor of a trampoline, providing people much needed support when there's a sudden shock to the economy or their lives that drops their ability to provide for themselves, and also a mechanism that promotes the kind of risk-taking we want in our society.  The question is how to make that stronger.

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