EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds

The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which go to millions of low- and moderate-income working families each year, provide work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows.  In addition, recent ground-breaking research suggests the income from these credits leads to benefits at virtually every stage of life.  For instance, research indicates that children in families receiving the credits do better in school, are likelier to attend college, and can be expected to earn more as adults.

Numerous studies show that working-family tax credits boost work effort.  The EITC expansions of the 1990s contributed as much to the subsequent increases in work among single mothers and female heads of households as the welfare changes of that period, extensive research has found.  Women who benefited from those EITC expansions also experienced higher wage growth in subsequent years than otherwise-similar women who didn’t benefit.  And, by boosting the employment and earnings of working-age women, the EITC boosts the size of the Social Security retirement benefits they ultimately will receive.

In addition, the research shows that by boosting the employment of single mothers, the EITC reduces the number of female-headed households receiving cash welfare assistance.  As the University of California’s Hilary Hoynes writes, the EITC “may ultimately be judged one of the most successful labor market innovations in U.S. history.” [2]  The CTC is newer and has not been studied to the same extent, but it shares key design features with the EITC:  it is available only to working families and phases in as earnings increase.

The EITC may also improve the health of infants and mothers, research indicates.  Infants born to mothers who could receive the largest EITC increases in the 1990s had the greatest improvements in such birth indicators as low-weight births and premature births.  Similarly, mothers who received the largest EITC increases in the 1990s had greater improvements in their own health indicators.

Moreover, research suggests that income from the EITC and CTC leads to improved educational outcomes for young children in low-income households.  For each $1,000 increase in annual income over two to five years, children’s school performance improves on a variety of measures, including academic test scores.  A credit that’s worth about $3,000 (in 2005 dollars) during a child’s early years may boost his or her achievement by the equivalent of about two extra months of schooling.

The credits’ success in boosting work effort and earnings extends into the next generation, the new research indicates.  Children whose families receive more income from refundable tax credits do better in school, are likelier to attend college, and likely earn more as adults; they also are likelier to avoid the early onset of disabilities and other illnesses associated with child poverty, which further enhances their earnings ability as adults, some research suggests.

Finally, the working-family tax credits reduce poverty, by encouraging work and supplementing the wages of poor or near-poor workers.  This is particularly important since large numbers of Americans work for low wages, the minimum wage’s purchasing power is substantially lower than in the 1960s and 1970s, and job growth thus far in the economic recovery has been disproportionately concentrated in low-wage occupations.

See the chart below for a summary of the research on the EITC and CTC. [3]

How the EITC and CTC Work

The EITC, a federal tax credit for low- and moderate-income working families and individuals, is designed to encourage and reward work, offset federal payroll and income taxes, and raise living standards.  To claim the credit, a taxpayer must have earnings from a job.  The EITC is “refundable,” meaning that if it exceeds a low-wage worker’s federal income tax liability, the Internal Revenue Service refunds the balance to the taxpayer.

The EITC’s primary recipients are working parents with children, though a small EITC is available to working adults without dependent children.  The credit rises with earned income until reaching a maximum (which varies by the number of qualified children) and then phases out as income rises further. [4]   For 2014, the phase-outs begin at about $17,830 [5] for single filers and about $23,260 for married filers, and the average size of the credit is expected to be close to its 2013 value of $2,828 for a family with children and $280 for a family without children. [6] Twenty-five states plus the District of Columbia also offer a state EITC, typically set at a percentage of the federal EITC. [7]

The CTC, which provides taxpayers up to $1,000 for each dependent child under age 17, is designed to help families offset the costs of raising children. [8]   Unlike the EITC, the CTC not only helps low- and moderate-income families but extends to middle-income and most upper-middle-income families as well, because it phases out at higher income levels than the EITC. [9]

Like the EITC, the CTC increases with earnings, but unlike the EITC, the first $3,000 in earnings does not count when determining the CTC.  Families receive a refund equal to 15 percent of their earnings above $3,000, up to the credit’s full $1,000-per-child value.  For example, a mother with two children who works full time at the minimum wage — earning $14,500 in 2014 — will receive a refund of $1,725 (15 percent of $11,500).  This refundable part of the CTC, called the Additional Child Tax Credit, is particularly beneficial to lower-wage workers.

The CTC is newer than the EITC and has not been studied to the same extent, but like the EITC it is available only to working families and phases in as earnings increase.  Research strongly suggests that low-income families do not understand how much of their tax refund comes from the EITC or the CTC, but they do understand that if they work they can qualify for significant tax-based benefits. [10]   Moreover, research shows that boosting working families’ incomes is associated with improvements in children’s educational (and other) outcomes, strongly suggesting that both credits improve opportunities for children.


Encouraging Work

The EITC significantly increases recipients’ work effort, according to substantial research over the past 15 years. [11]  (As noted, the CTC shares key design features with the EITC, suggesting that it may also have positive work effects.)

The EITC is particularly effective at encouraging work among single mothers working for low wages. [12]  It is considered among the most effective policies for increasing the work and earnings of female-headed families.

Single mothers are the group most likely to be eligible for the EITC because they tend to have low earnings and qualifying children.  As Figure 1 shows, single mothers experienced a marked increase in paid employment following the EITC expansions of the early 1990s, relative to married women and single women without children. [13]   Economic studies controlling for other policy and economic changes during this period also found that the most significant gains in employment attributable

to the EITC occurred among mothers with young children and mothers with low education. [14]

Other research has found that EITC expansions between 1984 and 1996 accounted for more than half of the large increase in employment among single mothers during that period. [15]   The EITC expansions of the 1990s “appear to be the most important single factor in explaining why female family heads increased their employment over 1993-1999,” [16] University of Chicago economist Jeffrey Grogger has concluded.  Those expansions, he found, actually had a larger effect in increasing employment among single mothers than the 1996 welfare law.  (See Figure 2.)  In addition, women who were eligible to benefit the most from those EITC expansions apparently had higher wage growth in later years than other similarly situated women. [17]


By boosting employment among single mothers, the EITC also reduces cash welfare caseloads significantly.  The EITC expansions of the 1990s induced more than a half a million families to move from cash welfare assistance to work, research shows. [18]   In fact, the research found those EITC expansions likely contributed about as much to the fall between 1993 and 1999 in the number of female-headed households receiving cash welfare assistance as time limits and other welfare reform changes. [19]

Moreover, by boosting the employment and earnings of working-age women, the EITC also boosts their Social Security retirement benefits, which are based on a person’s work history.  Higher Social Security benefits, in turn, reduce the extent and severity of poverty among seniors. [20]

There is little evidence that when EITC benefits phase down as a family’s income rises above certain levels, workers substantially reduce their work hours. [21]   Instead, research shows, the EITC has a powerful effect in inducing many more workers to enter the labor force and go to work.

Improving Infant and Maternal Health

The EITC may improve the health of infants and mothers, research finds.  Research looking at the EITC’s effects on maternal health found that women who were eligible for the largest EITC expansion in the 1990s experienced significant improvement in a variety of health indicators, including reduced mental stress, compared to similar women who would not have been eligible for the expansion. [22]

Researchers at the University of California at Davis compared changes in birth outcomes for mothers who likely received the largest increases in their EITCs under the expansions of the 1990s and mothers who likely received the smallest increases. [23]  They found that infants born to mothers who likely received the largest increases had the greatest improvements in a number of birth indicators, such as fewer low-weight births and premature births. [24]   Also, mothers who likely received the largest increases were likelier to receive prenatal care, including care before the critical third trimester, and to smoke and drink less during pregnancy.  Changes in health insurance coverage did not seem to be a primary explanation for these improved health outcomes. [25]

Other studies have also found strong associations between EITC expansions and improvements in birth weight and indicated that mothers receiving the EITC were less likely to smoke during pregnancy than similarly situated mothers who did not receive it. [26]

Boosting Children’s School Achievement and College Attendance Rates

Income support from the EITC and CTC has been linked to better academic achievement for elementary and middle-school students. [27]   Studies have found that children in low-income families that receive larger state or federal EITCs tend to score better on tests of reading and (particularly) math, compared with children from largely similar families not targeted for large credit expansions.  They also are more likely to finish high school and go on to college.

In addition, larger tax refunds make college more affordable for low-income families with high-school seniors and are associated with significant increases in their college attendance.

A recent working paper examining data from before and after changes to federal and state EITCs finds that children receiving larger EITCs tend to do better academically in both the short and long term. [28]   Receipt of larger EITCs is linked to:

  • Higher test scores, particularly in math.   Larger EITCs are linked to improved test scores in the year of receipt for both elementary and middle-school students.
  • Higher high-school graduation rates.  Children who qualify for a larger EITC in childhood are more likely to graduate high school or complete a General Educational Development (GED) degree.
  • Higher college attendance rates.  The larger the EITC a child’s family receives, the more likely he or she will enter college by age 19 or 20.

The size of these effects is noteworthy.  The paper estimates that a child in a family eligible for the largest EITC expansion in the early 1990s would have a 4.8 percentage-point higher probability of completing one or more years of college by age 19 — an improvement comparable to the effect of major educational interventions such as reducing classroom size.  Moreover, the findings show that the academic benefits of larger EITCs extend to children of all ages and racial and ethnic groups, with some suggestive evidence that the benefits are slightly larger for minority children and boys.

This paper adds to an already substantial body of evidence that the EITC and CTC boost school performance:

  • Researchers who analyzed data for grades 3-8 from a large urban school district and the corresponding U.S. tax records for families in the district linked additional income from the EITC and CTC with significant increases in students’ test scores. [29]  
  • Likewise, researchers who studied nearly two decades of data on mothers and their children concluded that students with additional income from the EITC had larger combined math and reading test scores by large magnitudes. [30]


Research not directly on the tax credits also suggests that income-boosting policies like the EITC and CTC boost school performance.  Researchers analyzing ten anti-poverty and welfare-to-work experiments found a consistent pattern of better school results for low-income children in programs that provided more income.  Each $1,000 increase (in 2001 dollars) in annual income — the equivalent of a full CTC for one child — for two to five years led to modest but statistically significant increases in young children’s school performance on a number of measures, including test scores.  The researchers noted that their results have important implications for policies that link increases in income to increases in employment, like the EITC and CTC. [31]

The study’s authors suggest that receiving the EITC in the spring before college helps cash-strapped families afford college:  “[T]he tax refunds that we study may effectively alleviate credit constrain[t]s for families with high-school seniors, allowing youths from these families to attend college.”  They also find that both federal and state EITCs increase college enrollment, noting, “[T]he enrollment response is larger in states that offer tax refunds tied to federal refundable credits.”

Source: www.cbpp.org

Category: Bank

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