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A Big Financial Boost for Low-Income Families

The Earned Income Tax Credit is a boon to low-income families, both financially and motivationally, according to a new study.
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(Photo: Simon Cunningham/Flickr)

(Photo: Simon Cunningham/Flickr)

The motto “if you work, you should not be poor,” was a staple of President Bill Clinton’s time in office. To be sure, figuring out ways to better compensate the so-called “working poor” is a massively complex issue, and one that certainly can’t be eradicated with a single cure-all solution. But it’s refreshing to hear that at least one program—the Earned Income Tax Credit program, or EITC—is actually netting positive results. In a new study, researchers are crediting the EITC with giving low-earning families a sense of self-respect—something that’s valuable, even if it’s tough to tack a dollar amount to.

First created in 1975, the $65 billion Earned Income Tax Credit program impacts about seven million people each year. Because the credit is geared toward low-income earners, particularly those with children (only five percent of EITC dollars go to childless adults), the idea is that the EITC supports a work ethic by rewarding it with free cash. That’s key, as it’s an oft-contested aspect of welfare dollars. The EITC represents about one-fifth of the typical recipient family income; on average, a family will receive a tax credit of almost $3,000.

About 25 percent of the EITC was used to pay off bills or debt, while 40 percent of the money was spent on things like furniture or “upward mobility” goals, like schooling.

In their study released last week in the American Sociological Review, Michigan State University researchers conducted interviews with 115 low-income household heads in the Boston area who had received an EITC refund of at least $1,000 in the late 2000s. On average, the money was put to good use: About 25 percent of the EITC was used to pay off bills or debt, while 40 percent of the money was spent on things like furniture or “upward mobility” goals, like schooling. On average, 17 percent of the lump sum amount was stowed away in savings.

There were many other reported benefits to the EITC, aside from the fact that it’s targeted at an economically valued group—working parents. For one, the EITC is delivered through the economically normalizing Internal Revenue Service, rather than something like a welfare office. “It is distributed in a way that is less stigmatizing. They don’t go to the welfare office and ask for assistance; they qualify for it through tax forms,” says Michigan State professor Jennifer Sykes, one of the lead authors on the study.

And because the EITC is delivered once per year in a lump sum, the researchers found that the allotted money became something of an annual inspiration. Only 10 percent of the EITC money went toward family “treats,” but that meager amount still allowed low-earning workers to experience a sense of social inclusion—feeling middle-class, even if only for a brief amount of time.

“It allows people to dream throughout the year,” Sykes says. “They get this modest windfall of money—most of which goes to debt reconciliation and small expenditures—but some of which can be considered more discretionary.”

And in an age where social mobility remains arduous at best, Sykes argues that's an important benefit.

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