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Tax Credits Benefit Families and the Economy

Small credits make a big difference

This article originally appeared in the April - May 2010 Newsletter.

Bread’s 2010 Offering of Letters urges Congress to protect and strengthen key tax credits that help low-wage workers bridge the gap between what they earn and what it costs to support a family. The most important of these credits is the Earned Income Tax Credit (EITC), the only provision in the U.S. tax code targeted to low-income people. In 2009, the EITC lifted 6.6 million people (including 3.3 million children) above the federal poverty line.

About half of all U.S. households with children are eligible for the EITC at some point—an alarming statistic. In fact, slightly more than half our population lives in poverty at some time before age 65.

The EITC helps low-income families work their way out of poverty and helps prevent families that have fallen into poverty from becoming trapped there. A study by tax experts Tim Dowd of the Joint Committee on Taxation and John Horowitz of Ball State University found that more than 60 percent of the families who file for the EITC do so for only one or two years at a time.

This tax credit can make a big difference in these families’ lives, according to EITC participants who testified at a March 2010 hearing in support of Oregon’s state EITC, which complements the federal EITC.

Andrea Paluso explained that when her mother had a full-time job, a part-time job, and a full-time college schedule, the EITC gave her a chance to “exhale for one second.” Father C. Paul Schroeder said that when he was in seminary and facing financial challenges, the EITC gave him a “real shot in the arm.”

Ian Finch grew up in poverty and when he became a single father himself, he was determined to break the cycle. “The EITC has benefited my family in so many ways,” he said, noting happily that he now earns too much money to be eligible for the tax credit.

EITC tax refunds are typically spent soon after they are received—on goods and services that employ other people and help keep local economies active. On average, every dollar in EITC refunds produces $1.26 in economic activity.

The tendency of families to participate in EITC intermittently means that in the long run, they contribute far more in taxes than they receive in EITC refunds. The study by Dowd and Horowitz found that over an 18-year period, the combined group of people who filed for the EITC at least once generated $473 billion in tax revenue.

Congress should protect and strengthen the EITC because it helps low-income workers build a stable financial future and because it helps the U.S. economy in both the short- and long-term.

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