EITC may not affect personal choices of working poor, but it does lift millions out of poverty

April 8, 2014

Contact: Sarah Halpern-Meekin, halpernmeeki@wisc.edu, (608) 263-4691

"If you work, you should not be poor." This was the promise President Bill Clinton was working to fulfill in 1993, when he expanded a tax credit that benefits low-wage working families. Less than two decades later, in 2010, almost 27 million families received $59.5 billion from the credit, called the Earned Income Tax Credit (EITC), lifting some 6.3 million people, including 3.3 million children, out of poverty.

White House staff hoped the EITC would reward poor parents for working, but some researchers and critics feared that it might discourage single mothers from marrying or incentivize women to have more children to boost their tax refund.

A new University of Wisconsin–Cornell University study reveals this is not the case.

"We used in-depth interviews with EITC recipients to examine how they understand and respond to its incentive structures regarding earnings, marriage, and childbearing," noted Sarah Halpern-Meekin, assistant professor of human development and family studies and affiliate of the Institute for Research on Poverty at UW–Madison.

Halpern-Meekin and coauthor Laura Tach, assistant professor of policy analysis and management at Cornell University, reported on interviews with 115 low-income tax filers in "Tax code knowledge and behavioral responses among EITC recipients," published online in December by the Journal of Policy Analysis and Management.

"Respondents consider their tax refund as a whole, without differentiating the portion from the EITC; as a result, they cannot predict how changes in their labor supply or marital status would affect their EITC refund," Tach and Halpern-Meekin wrote.

In the words of one of the respondents, a 25-year-old mother of three: "I mean, Earned Income Credit is nice, but it’s not everything! I'm not going to let it factor into my marriage if I ever want to get married. I'm not marrying the Earned Income Credit. I’m marrying the man I love."

Most low-income workers said their job situations offered no chance to change work hours, even if they wished to. "Workers in unstable jobs with little control over their schedules may find it difficult to control their total annual earnings in line with the incentives of the EIC schedule, and most do not know what those incentives are in the first place," the researchers wrote.

"The lack of behavioral response related to work intensity and marriage behaviors ... is due in large part to a lack of perception of the incentive structure, while the lack of behavioral response related to childbearing is ... because the perceived incentives are small relative to the cost of raising a child."

Tach and Halpern-Meekin report, "Rather than adjust work hours, defer marriage, or have additional children, respondents alter their tax filing status in order to maximize their refunds."

One way workers saw to gain a little financial control of their lives was the federal government's "W-4 Employee's Withholding Allowance Certificate." By claiming "zero" dependents and exemptions, anyone who wishes can maximize tax withholding from paychecks and may then reap a bigger refund when that money is returned to them at tax time.

Claiming zero is perfectly legal, but it's not always the best way to save because, unlike other savings options, the IRS pays zero interest. Trying to be nonjudgmental, the social scientists acknowledged the reasoning behind claiming zero: Out-of-sight, out-of-mind, those withheld dollars are safe—for months—from impulsive spending. Hefty refunds protect against the risk of owing money to the IRS at tax time and are something to look forward to for families who spend much of the year struggling to pay the bills.

Funding for the EITC study was provided by the Ford Foundation.