EITC as Income (In)Stability?
66 Pages Posted: 4 Sep 2013 Last revised: 26 Apr 2014
Date Written: August 25, 2013
Congress enacted the Earned Income Tax Credit (EITC), inter alia, 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, such as 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 working 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 byproduct 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.
Keywords: EITC, Earned Income Tax Credit, Income Stabilization, Automatic Stabilization
JEL Classification: E62, H20, H53, I38, K34
Suggested Citation: Suggested Citation