Sep.25

The American Earned Income Tax Credit

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Abstract:
While the U.S. Earned Income Tax Credit is well over a quarter-century old, its role as a major instrument of social assistance policy is a relatively recent development. This paper provides an overview of the operation of the EITC and recent developments in EITC-related analysis and innovation. Generally speaking, the lessons gained from the American EITC experience seem to be that earnings subsidies can be successfully administered through the tax code and that the EITC did increase labor force participation among lone parents. Anticipated perverse effects on labor supply of the credit phase-out have not been shown to be substantial. Understanding the connection between expansion of the EITC and the precipitous decline in the number of families receiving benefits from Aid to Families with Dependent Children and its successor program Temporary Assistance for Needy Families is complicated by near simultaneity between EITC expansion, state and national welfare reform efforts, and decline in unemployment rates. As experience with the EITC has grown, effects beyond labor supply are attracting attention, including consequences for saving and children’s well-being. American experience with the EITC is pertinent to consideration of policies intended to expand low-skill service employment in Europe.

Suggested citation: 
Wiseman, Michael. “The American Earned Income Tax Credit.” In (Austrian) Federal Ministry of Economics and Labour (in cooperation with L&R Social Research), Innovations in Labour Market Policies: Challenges in Times of Globalisation. Vienna: The Agency, pp. 123-133.