EITC as Income (In)Stability?
Kerry A. Ryan
Saint Louis University School of Law
August 25, 2013
Florida Tax Review, Forthcoming
Saint Louis U. Legal Studies Research Paper No. 2013-23
Congress enacted the Earned Income Tax Credit (EITC) to entice poor single mothers to work (or work more) as a means of lifting themselves out of poverty. Its design as a wage subsidy that phases out at higher earnings levels is intended to accomplish this goal. A strong labor market is crucial to the success of work-based benefit programs, like the EITC. The EITC can motivate female household heads to work (or work more) but they cannot act on that motivation if no jobs or additional hours exist. This article demonstrates that during economic downturns, the EITC wage subsidy contributes to, rather than prevents, poverty in single mother families. Lost EITC benefits exacerbate recession-induced earnings losses, a phenomenon this article refers to as income destabilization. In contrast, the EITC stabilizes the incomes of its wealthier beneficiaries as increased credit amounts offset underlying salary declines. While this pattern of income (de)stabilization is an unintended by-product of the design of the EITC as a targeted wage subsidy, its negative impact on the economic welfare of female-headed households is problematic, given that these same families are the historically-targeted program beneficiaries. This article offers a narrowly-tailored proposal that alters the structure of the EITC during recessionary periods in order to prevent EITC-induced income destabilization.
Number of Pages in PDF File: 77
Keywords: EITC, Earned Income Tax Credit, Income Stabilization, Automatic Stabilization
JEL Classification: E62, H20, H53, I38, K34Accepted Paper Series
Date posted: September 4, 2013
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