Cut the Earned Income Tax Credit

Chris EdwardsIn the newCato Handbook for Policymakers,I propose cutting the earned income tax credit (EITC). I previously critiqued the credit inthis study with Veronique de Rugy. While the credit receives support from both parties in Congress, the closer you look the more flawed it appears.The EITC provides benefits to households with earnings from employment. In 2021, it provided $71 billion in benefits to 27 million recipients. The EITC is mainly a spending program, not a tax ‐​cutting program. The credit is “refundable,” meaning that individuals who pay no income taxes receive payments from the government. In 2021, $69 billion of the benefits were refundable.The EITC encourages some individuals to join the workforce, but it also discourages many individuals already in the workforce from increasing their earnings. The EITC has a high error and fraud rate, and the spending part of the EITC imposes a large cost on the taxpayers who fund it.There is another problem. To the extent that the EITC boosts labor supply, it pushes down market wages. This effect is usually overlooked by EITC supporters. People complain that some employers, such as fast ‐​food restaurants, pay low wages, but the EITC puts downward pressure on those wages. To an extent, the EITC is a business subsidy helping employers pay low wages.Michael Keen and Joel Slemrod summarize this unfortunate wage effect of the EITC in their excellent 2021 bookRebellion, Rascal...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs