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EITC as Income (In)Stability?

66 Pages Posted: 4 Sep 2013 Last revised: 26 Apr 2014

Kerry A. Ryan

Saint Louis University School of Law

Date Written: August 25, 2013

Abstract

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

Ryan, Kerry A., EITC as Income (In)Stability? (August 25, 2013). 15 Fla. Tax Rev. 583 (2014); Saint Louis U. Legal Studies Research Paper No. 2013-23. Available at SSRN: https://ssrn.com/abstract=2320178

Kerry A. Ryan (Contact Author)

Saint Louis University School of Law ( email )

100 N. Tucker Blvd.
St. Louis, MO 63101
United States
3149777237 (Phone)
3149773332 (Fax)

HOME PAGE: http://law.slu.edu/

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