New IRS Data Shows 88 Percent of EITC Benefits in 2007 Were Paid to Low Income Families

EITC, not minimum wage hikes, have largest positive impact on Americans living in poverty
  • Publication Date: August 2009

  • Topics: Minimum Wage

Washington D.C. – The annual Individual Income Tax Returns report released yesterday by the Internal Revenue Service provides more evidence that the Earned Income Tax Credit (EITC) is actually better equipped to target poverty than other policy tools, including the July 24th federal minimum wage increase.

According to the report, Statistics of Income, tax return data from 2007 shows 88 percent of refundable EITC benefits – a total of $37.3 million – were paid directly to families with incomes of less than $25,000 a year. Employment Policies Institute (EPI) research from Syracuse University shows that an overwhelming majority (83 percent) of the benefits of minimum wage increases go to families above the poverty line. The average family income of those who will benefit from the 2009 minimum wage hike is over $47,000.

The new IRS report shows that an additional $4.9 million in EITC benefits were used to offset income or other taxes owed by families with incomes of less than $25,000 a year. That’s a total of over $42 million benefiting working families.

Published by EPI, Helping Low-wage Americans: The Earned Income Tax Credit is a collection of information showcasing how the EITC successfully targets low income Americans. This and other reference tools can be found on our web site, EPI supports the use of the Earned Income Tax Credit as a more effective solution than minimum wage increases to address poverty. The EITC and its state supplements provide tax-free cash income to workers in poor families based on their wage earnings. Since the EITC’s costs are not borne by employers, such work subsidies raise workers’ income without causing unemployment or a drop in work hours.

In stark contrast, wage increases like the July 24th federal hike have historically resulted in job loss concentrated among the most at-risk workers. Wage hikes are a blunt and ineffective means of assisting low-income employees because of the simple fact that most minimum wage earners are not currently living in poverty. Research from American University and Cornell University shows the recent $7.25 minimum wage has largely benefitted workers living in non-poor households with incomes that are over twice or three times the poverty line. Only 15.1 percent of the benefits are going to families living below the poverty line.

The success of the Federal EITC has already led 21 states and the District of Columbia to develop their own supplementary income tax credit. No other government program has been as effective in lifting families out of poverty. Because the EITC takes into consideration total family income and can be crafted to offer additional credits for children, the benefits are better targeted to those truly in need.

Economists from the Federal Reserve and Michigan State University have found that EITC recipients increase their work output and enjoy higher earnings, leading them toward self-sufficiency.

“This is a rare policy-no-brainer,” said Kristen Lopez Eastlick, Senior Research Analyst with EPI. “Rather than continuing to peddle feel-good policies like the minimum wage that cause more harm than good, policymakers should expand the Earned Income Tax Credit.”