The Earned Income Tax Credit and its Effects in the US

 

The Earned Income Tax Credit (EITC) was incepted in the year nineteen hundred and seventy-five. The program is a tax cushion meant for both low-income and middle- income working individuals. It is aimed at offsetting payroll and income taxes and in the process, increase the amount of cash available for disposal. It has in recent years expanded considerably and currently; it is the most effective anti-poverty program present in the United States. Workers receive a credit similar to the percentage of their income up to the established maximum credit limit (Dahl & Lance, 2012). As per two thousand and three, a total of twenty-two million families had received the EITC payments, and the amount that had been disbursed by then was 38.7 billion dollars. The objective of EITC has been to transfer income; promote equal distribution of resources and while in the process encouraging citizens to work.

  The program has received significant political support over the years, and its prominence has been on the rise previously, and the proprietors have shifted the focus to limit the reliance that may be promoted by the welfare plans contained inside Earned Income Tax Credit. To be a beneficiary of EITC, the low- income workers must have filed a tax return. It is implemented under the Internal Revenue Service (IRS). Elssa & Hilary (2004) found out that this approach adopted has various advantages which are inclusive of reducing administrative costs; it has proved to be efficient; has over seventy-five percent participation nationwide and it is independent of employer cost as no employer is required in filing documentation for an employee. Discussed are some of the benefits.

Promotion of working culture; Encouraging and Rewarding work.

No other single program encourages individuals to work in the U.S than the Earned Income Tax Credit. The program is designed to change the attitude of people towards as an activity that is enjoyable to engage in and particularly encourages single parents, and it makes work attractive by offering attractive waged and salaries and also improving the working conditions ( Ellwood,2000 pp1063-1105). The program has the strongest working incentive in the labor market; it allows an individual to choose the hours that they feel to dedicate to working.  The freedom of choosing working hours serves to the best interest of single mothers as it only allows them to work when they are free from parenting roles like when the children are in schools. The incentive further allows the single parents to choose the number of hours that they feel they need to work and they have the option of increasing the number of workings if they need some extra cash that they can use to meet other family needs.

 A few thousand dollars can noticeably help persuade single parents to favor working as opposed to not working and just wait for the welfare program. The dollars are given independent of average return to working. The dollars constitute the after-tax earnings in addition to the benefits of cash that a single parent preferably a woman gets if she chooses to work less the monetary benefits that she receives if she was not involved in working. The average net return to work was 1,442 dollars by the year nineteen ninety-six (Elssa & Hilary, 2004). This increase in incentives was most considerably designed to favor those single mothers deemed to have low skills and expertise. The program also takes into consideration, the difference in women based on the number of children, the respective state taxes that they are subject to and the relative Tax Credit benefits in comparison to the cost of living in the states that they are residing.

 The level of employment for single mothers has been on the rise since the inception of the Earned Income Tax Credit, and most studies attribute it to have a seven percentage above average points or even higher. The largest changes witnessed in the employment of single mothers between the years 1984 and 2005 has been that EITC programs have led to the employment of a single mother without high school degree.  The employment has also over the years favored the single mothers as opposed to single women without children. However, this promotion has had various hindrances. Some employers prefer certain working hours and therefore, limiting the choosing of hours to within the range stated by the employer. Other limitations include measurement disparities in hours and the flawed perception of marginal tax rates as they lack clear explanations ( Elssa & Liebman, 1996 pp 605-637).

Reduction of poverty levels and Promoting Equity

Dahl and Lance (2012) suggested that the Earned Income Tax Credit main impact is a reduction of poverty levels for individuals and families and promoting a fair distribution of resources and it achieves these objectives by employing the two strategies of supplementing salaries of low-income earning individuals and encouraging individuals to embrace the working culture. The food-preparation sector has an employment rate of one for eleven jobs, and it employs over an approximate of 12 million people. However, it has the least payment rate, and most works have to come to the realization that not even an increase in the number of working hours can get out of poverty. By supplementing the wages, EITC helps the families to make ends meet, and it also comes along with other on-c ash benefits and also putting in place tax credits that are refundable as income and these credits have helped elevate over 5 million children out of poverty more than any other program in the U.S.

The low income earning individuals are exempted from paying taxes in attempts of increasing their available disposable income to meet family needs. Also, the Earned Income Tax Credit has a refundable nature where persons are allowed to collect tax credit which in return boosts their income. These tax credits are received through two ways; receiving the EITC annually as a tax refund and receiving it in portions or installments after regular intervals in the form of a paycheck (Elssa & Liebman, 1996 pp 605-637). Approximately all EITC beneficiaries do apply for their tax returns and the lump sum payments provided gives room for flexibility and allows the persons to utilize them effectively.

 The cost of the Earned Income Tax Credit by the year 2013 was fifty-six billion dollars making it the third largest in-country behind Medicaid and Federal respectively. In the year 2010 alone, an approximate of twenty-seven million American homes received more than 56 billion dollars in payments from the EITC program. The EITC dollars have a significant effect on improving the lives of people and communities, and the program has so far facilitated any repayment of payroll taxes ought to be paid low-earning working individuals. The American Census Bureau in 2010 used a different approach in calculating the level of poverty in the United States; the result was that the Earned Income Tax Credit had managed to lift an approximate 5.4 million people way above the poverty line (Elssa & Hilary, 2004).

The amounts awarded by the EITC program is typically based on the recipients’ income; the Earned Income Tax Credit has a structural model upon which it categorizes the various ranges of income received, the marital status and the number of children in a family. The lowest income earners are the biggest beneficiaries of the EITC program. The result indicated by recent  researchers suggests that EITC   pays for home necessities such as clothing, food and house rent, home maintenance expenses, car and fueling and maintenance for those use them to commute to a job and also obtain additional educational training (Dahl & Lance, 2012). The EITC also came along with SNAP (food stamp) advantages.

Improving infant and maternal health

  The Earned Income Tax Credit has significantly impacted on the boosting the health of infants and mothers. Research conducted on Earned Income Tax Credit benefits on maternal health found out that, the mothers eligible for the program primarily benefited from financial assistance extended to them and in the result, there were minimum cases of reduced psychological stress as compared to the mothers who not eligible for the program. The Earned Income Tax Credit experienced the largest expansion rate in the 1990s, and University of California Researches have found out that’s the best period that the birth outcomes were better and fewer infant deaths were reported (Elssa & Liebman, 1996 pp 605-637). There were great improvements in the weight of children being born, and there were increased chances of them being within the normal recommended weight range.

Research by Ellwood (2000) found that it is also important to note that the benefits awarded to the mothers by Earned Income Tax Credit did vary and the effects were also not similar. The mothers who received the largest to have allocations by the program were more likely to experience better birth outcomes than those mothers who received lower allocations. The birth indicators for infants from mothers with bigger allocations in the program were good as they constituted fewer low-weight births and fewer premature births and therefore, in the period of that rapid expansion rate, maternal deaths were significantly reduced. The mothers were able to get extensive and well structured medical care that did start before the third trimester of pregnancy which is very critical to birth. The program also undertook awareness campaigns aimed at educating the mothers on healthy lifestyle during and after pregnancy such as championing against smoking and limiting drinking during pregnancy and also healthy feeding.

Improving work effort and earnings for children when they reach adulthood

Earned Income Tax Credit is complimented by Child Tax Credit (CTC) in boosting the parents’ efforts particularly the single mothers and the benefits from there in, trickles down to the next generation. The EITC program increases the total family income and the skills imparted to children by the Child Tax Credit.  A study conducted by University of California researchers shows that in the future, the one dollar of income earned through the two tax credit systems will increase the relative value of child’s future earnings by more than one dollar. The children raised in families where the parents are low-income earners are subjected to more, and therefore, they are associated with getting higher earnings in the future. It is also important to know that, research indicate that children from families that are beneficiaries of the tax credits (EITC and CTC) are likely to perform better in schools as compared to their colleagues from high-income end families (Elssa & Liebman, 1996 pp 605-637). The trend is brought about by the fact they are born healthier and more willing to work and earn with time than their peers.

Boosts self-Esteem of both men and women

Self-esteem is the feeling of being confident that an individual feels about himself or herself and also on the work or activities that he or she is involved. The greatest satisfaction for any man or woman is to be able to provide for his or her family. Men and women who parents and guardians channel all their energy into engaging in activities from where they can be able to generate some income to enable them to provide for their particular families. Research done by the American Sociological School found out that the individuals benefiting from the Earned Income Tax Credit recorded high self -esteem. This is because the EITC program did highlight and also underscore their roles and importance as providers and working parents. The research further revealed that the program had cultivated a culture of saving among the beneficiaries as seventeen percent of the lump sum amount awarded by the Earned Income Tax Credit did end in saving accounts and programs (Dahl & Lance, 2012).

 In conclusion, the Earned Income Tax Credit has been the most efficient program that has worked to improve the standards of living for the people; it has promoted working culture, reduced poverty levels significantly, reduced infant and maternal tragedies and improved self-esteem of individuals. However, the program has limitations which limit from carrying out a genuine and fair analysis of the rightful beneficiary. For example, more than quarter or an approximate of 28.5 percent of the payments made by the program are in error as per the most recent Internal Revenue (IRS) compliance study. And it is attributed that the largest source of the error was determining the child named for EITC payments rightfully qualify. Nevertheless, despite that shortcoming, the program remains very useful in improving the standards of living in the U.S, and so far it has achieved significant results

References

Dahl, Gordon B., and Lance Lochner. “The impact of family income on child achievement:               Evidence from the Earned income tax credit.” The American Economic Review 102.5               (2012): 1927-1956.

Eissa, Nada, and Hilary Williamson Hoynes (2004), “Taxes and the Labor Market Participation               of Married Couples: The Earned Income Tax Credit.”  Journal of Public Economics 88               (9-10): 1931-1958.

Eissa, N. and Liebman, J.B., 1996. Labor supply response to the earned income tax credit. The quarterly journal of economics, 111(2), pp.605-637.

Ellwood, D.T., 2000. The impact of the earned income tax credit and social policy reforms on work, marriage, and living arrangements. National tax journal, pp.1063-1105.