By Leslie McGranahan and Diane W. Schanzenbach- FEDERAL RESERVE BANK OF CHICAGO
The Earned Income Tax Credit (EITC) began in 1975 as a small program designed to offset payroll taxes among low income working families with children. Over the subsequent four decades it has grown in to one of the largest means tested Federal programs. For Tax Year 2011, the Federal government spent $63 Billion on the EITC rendering it the largest Federal cash assistance program and the second largest nonhealth means tested program, after the Supplemental Nutrition Assistance Program (SNAP).
The EITC is structured as a subsidy to work among targeted families. Households receive a benefit that equals a percentage of earnings up to a maximum credit amount. Households with earnings along a plateau range also receive this maximum credit. Higher income households gradually see their credit phase out as earnings increase until the entire credit is phased out. This complex structure has led researchers to investigate the labor supply effects of the EITC. Most academic research on the EITC has highlighted the EITCs positive labor supply effect s especially among single mothers. The EITC has served to increase work participation among targeted households without reducing the labor supply of working households.
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