Analysis Of The Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a program that was set in place, in 1975, to improve “the economic status of low-income persons […] granting nearly $40 billion to low-income households” (Borjas, 59). As is clear from the name of the program, The EITC is a program that provides tax credits to those who qualify, the EITC could even produce a negative tax liability for some households, in particular the type I will discuss, which would provide substantial income increases for these households. In order to qualify for the EITC, the recipients must be active members of the labor force, in that they must have labor income, and for the group that I will be focusing on, single mothers, total household income must be below $33,241 for single parents with one child and $37,783 for single parents with two or more children. According to Economist Hillary Hoynes, in a presentation given to the Chicago Federal Reserve Board in 2007, the maximum available credit for a single parent with 1 child was $2,853, with the maximum available credit for single parents with two or more children being $4,716. (Hoynes, 2007) The EITC has provided assistance to countless American families while still providing them with an incentive to remain in the labor force, unlike many other welfare programs. I will focus on a certain subset of people receiving the Earned Income Tax Credit: single-mothers.

It has been found that the Earned Income Tax Credit increases the labor supply of single mothers as it provides a higher degree of income which compensates for the losses associated with child care and other factors. The labor supply of single-mothers is a difficult thing to put into perspective, as the decisions that go into a single-mother’s decision on how m...

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...to provide enough incentive to single mothers with only one child to get these women to enter the labor market, which means that the program is failing to draw women away from traditional welfare programs. Failing to draw these women from traditional welfare programs means that the Earned Income Tax Credit is not succeeding in relieving the strain that traditional welfare programs can put on the economy. Due to welfare reform that has taken place in the last decade such as a “decline in cash welfare benefits for non-workers” (Hoynes, 2007) single mothers have far fewer options than they have in the past, and the expansion of the Earned Income Tax Credit program can be a savior for these single parents in need of assistance, as long as the assistance is enough to cover the costs associated with supplying labor to an economy while still raising a child. (Hoynes, 2007)