Why the EITC Doesn't Make Work Pay

Abstract

Since 1975, the earned income tax credit (EITC) has transformed from a small, obscure provision of the federal tax code into one of the largest programs in the U.S. social welfare system. Today, the EITC provides $47 billion in benefits each year to 24 million workers and their families. Bill Clinton famously called the EITC “a cornerstone of our effort to reform the welfare system and make work pay.”

But a closer look calls into question the claim that the EITC makes work pay. U.S. law entrenches family poverty in the United States, making it impossible for the EITC - or any other modest earnings subsidy - to make meaningful reductions in poverty, even among workers. According to realistic measures of social inclusion and economic well-being, the EITC reduces poverty only modestly, and even the maximum credit falls short of closing the gap between low-wage earnings and poverty. At the same time, gaps in other social welfare programs leave low-income workers vulnerable to the job disruptions that characterize low-wage work - when the EITC provides no assistance at all.

This symposium paper highlights - and challenges - two assumptions that underlie conventional praise for the EITC. First, analysts often adopt the official poverty line as the metric for success in “making work pay,” despite its inadequacy as a measure of economic distress and social exclusion. Adopting a more realistic version of the poverty line reveals how little the EITC accomplishes - or, put another way, how ambitious a program would have to be to make work pay. Second, discussions of the EITC typically focus on the situation of workers while they hold jobs, ignoring the frequent spells of job disruption due to unemployment, disability, and family needs that are common among low-wage workers. This limited perspective may be appropriate for technocratic discussions of EITC program design, because the EITC, like any wage or earnings subsidy, is designed only to assist the employed. It is, thus, a shortcoming of wage subsidies in general, and not the EITC in particular, that gaps in the social safety net leave low-income workers vulnerable to involuntary work disruption. But the contours of complementary programs should inform claims about the success of the EITC in “making work pay” - that is, in assuring a decent standard of living to those willing to work, even if (like many low-income workers) they do not succeed in working full-time, year-round.

Keywords: earned income tax credit, EITC, poverty, earnings subsidy, wage subsidy, poverty line