The Effects of the Earned Income Tax Credit on Children's Income and Poverty

Abstract

The Earned Income Tax Credit (EITC) has emerged as a central program for low-income families with children since its incremental expansion was fully implemented by 1996. This study examined the contribution of the fully expanded EITC to the children's economic well-being through two measures: (1) the effect on disposable income and (2) the effects on the poverty rate and the poverty gap. The study found that for all American children under age 18, the EITC provided little increase in disposable income (1.2%) but a modest reduction in child poverty (15%). For recipient families with children under age 18, the EITC had a greater impact: a 10% raise in disposable income and a 27% reduction in the poverty rate. Comparing the relative increase in disposable income for different groups of recipient families, the EITC particularly favored families of single mothers or young parents, welfare families, the extreme poor, and large families. However, these groups fared least well in terms of the EITC's relative effect on poverty. From these findings, the study concludes that the current EITC is insufficient in the fight against a high incidence of child poverty. To improve its anti-poverty effectiveness, several policy changes are proposed: (1) extension of the maximum credit to recipients in the phase-in range; (2) adoption of variable credit rates as a function of the number of children; and (3) creation of a new child grant for poor children who are currently ineligible for theEITC.