Refundable Credits Have Cut Taxes for Low-Income Households

Research Report

Refundable Credits Have Cut Taxes for Low-Income Households

August 19, 2008

Abstract

In 1979, federal taxes claimed 8 percent of the income of households in the lowest quintile of the income distribution.1 Over the following three decades, the average
effective tax rate (ETR) taxes as a percentage of income fell by nearly half to 4.3 percent in 2005. Most of the decline resulted from a sharp drop in the individual income tax, primarily due to expansion of the earned income tax credit and the child tax credit (CTC). Because the EITC is refundable and the CTC is partially refundable, they can reduce a households tax liability below zero and generate a net payment.

To reuse content from Urban Institute, visit copyright.com, search for the publications, choose from a list of licenses, and complete the transaction.