Earned Income and the Working Poor

 

Poverty

The EITC: Encouraging Economic Mobility for the Working Poor

Kathryn Edin Faculty ResearcherKathryn Edin, Professor of Public Policy and Management, Harvard Kennedy SchoolPaper Title
The Role of Earned Income Tax Credit in the Budgets of Low-Income FamiliesCoauthors
Ruby Mendenhall,
University of Illinois,
Champaign/Urbana;
Jeffrey Kling,
Congressional Budget
Office and National
Bureau of Economic
Research;
Susan Crowley,
Jennifer Sykes,
Laura Tach,
Harvard University;
Katrin Kriz,
Emmanuel College

Social policy in the United States has shifted dramatically since the early 1990s, with welfare reform shrinking a needs-based safety net and placing greater emphasis on work-based wage subsidy programs. The most significant of these is the Earned Income Tax Credit (EITC), a means-tested earnings supplement for low-wage workers with dependent children. Introduced in 1975 but greatly expanded in 1994, the EITC program is now credited with lifting more than 5.4 million people out of poverty each year. According to Kathryn Edin, Professor of Public Policy and Management at Harvard Kennedy School, it is “one of the most successful social policies that’s ever been invented.”

Despite this impact, however, little in-depth research has been conducted into how EITC recipients allocate the funds they receive. Is this money merely supplementing the current consumption of already stretched family budgets, or is it enabling debt repayment and asset accumulation? What are anticipated and actual expenditure patterns, and what factors contribute to discrepancies between the two? How can the EITC enable longer-term goal setting, thereby increasing economic mobility? These are questions Edin and her colleagues explore in their paper “The Role of Earned Income Tax Credit in the Budgets of Low-Income Families.”

Research into EITC use had previously been done through surveys, but, Edin explained in an interview, “no one had done extensive accounting” of how refunds were planned for and then actually spent. In their study, Edin and her colleagues did just that, visiting tax-preparation sites in Boston and Champaign-Urbana, Illinois. More than 650 families completed initial surveys, and after stratifying the potential participants by race and family structure, the researchers conducted follow-up interviews with 194 families six months later.

For the working poor, the EITC subsidy is substantial. In 2011, a family with three children earning less than $46,044 could claim a credit of $5,751, and families with one child were eligible for $3,094. These funds come in one lump sum, and thus play a unique role in many families’ finances, allowing them “to strategize more around their stretched budgets,” the authors write, “and [providing] some opportunity to meet their longer-term goals of social mobility.”

The study organized recipients’ allocation of funds into three categories: current consumption (child expenses, groceries); debt repayment; and asset building (savings, college tuition, home purchases or repairs). It found, for example, that 72 percent of participants planned to catch up on bills with their EITC funds but an even larger portion — 89 percent — actually did; indeed, 39 percent of the $804,400 EITC dollars in the study went toward reducing debt. And while 69 percent of participants claimed they “planned to invest some of their refund in asset accumulation” but only 47 percent managed to do so, the authors write that “many families viewed the EITC itself as a form of saving, and believed they were engaging in savings behavior simply by being eligible for the program.”

This, indeed, is where the real story lies. “I think our most important finding was actually to do with the idea of belonging,” Edin explains. “In the past, the poor had to work under the table to make ends meet, or get taxed on every dollar earned. Now, they can work and collect the EITC at H&R Block, like every other American, and it’s like a badge of citizenship. There’s a sense in which you’re part of the mainstream, you’re a taxpayer. People are proud to claim that money; they think they earned it.”

Furthermore, the study found that “the anticipation of receiving the refund in the future, over multiple years, was associated with a strong sense of future orientation.” Families used the refund as a vehicle for both financial stability (debt abolishment) and economic mobility (asset building); encouraging these uses as a “long-term anti-poverty strategy” is key. As Edin says, “It’s a very different narrative: ‘How am I going to survive until next month?’ versus ‘When my child goes to college in five years, how am I going to pay for it?’ The eitc gets people focused on a different set of concerns.”

—by Susannah Ketchum Glass

“I think our most important finding was actually to do with the idea of belonging. In the past, the poor had to work under the table to make ends meet, or get taxed on every dollar earned. Now, they can work and collect the EITC at H&R Block, like every other American, and it’s like a badge of citizenship.”


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