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This brief, part of the Urban Institute's "Recession and Recover" series, assesses the extent to which the Earned Income Tax Credit can help families hit by job losses and falling incomes during a recession.
No cash assistance program for low-income working
families is as widely received as the earned income tax
credit (EITC).1 In 2006 (the last year for which data are
available), 23 million households received a total of
$44.4 billion in reduced taxes and payments.
The share of eligible families receiving EITC benefits is
far higher than for public assistance programs like
Temporary Assistance for Needy Families and food
stamps (now called the Supplemental Nutrition Assistance
Program), presumably because EITC is provided
through the tax system and does not require application
through a separate agency.2 But the EITC is an
unreliable safety net for low-income families during a
recession, particularly as unemployment rates climb.
How It Works
The EITC rises by a fixed percentage of earnings from
the first dollar of earnings until the credit reaches a
maximum. The credit then stays flat until earnings hit a
phaseout range. From that point, the credit falls with
each additional dollar of income until it disappears
The EITC varies by a taxpayer’s filing status and
number of children. Families with two or more children
may receive a credit of up to $5,028 in 2009. The
maximum credit is $3,043 for families with one child
and just $457 for childless workers. The credit is fully
refundable: any excess beyond a family’s income tax
liability becomes a payment.
The real value of the maximum federal credit
tripled between 1975 and 1995 but stabilized after Congress
indexed it in 1996 (figure 1). Twenty-four states
also had their own EITCs in 2008; most were set as a
percentage of the federal credit, effectively indexing the
state credits for inflation, too (Levitis and Koulish 2008).
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