Low-wage parents can help their kids avoid poverty for decades if they get this one tax credit
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- The Earned Income Tax Credit reduced the likelihood of being in poverty, new research shows.
- Children exposed to the EITC at early ages were less likely to receive public assistance, such as WIC, as adults.
- The EITC reaches over 31 million households each year, according to the IRS.
New research reveals a key tax credit is helping keep many children out of poverty decades later.
Every $1,000 increase in children's average annual exposure to the Earned Income Tax Credit, which gives relief to middle- and low- earning taxpayers, reduced the likelihood of being in poverty or near-poverty as an adult by 7 percentage points, according to a new paper from the National Bureau of Economic Research. The paper also determined a reduction in public assistance such as WIC in adulthood.
"We think this is a powerful finding because it suggests that investing in children today can have long-term societal benefits in the form of reducing poverty and public assistance use," Katherine Michelmore, Associate Professor at the University of Michigan's Gerald R. Ford School of Public Policy who co-authored the study, told Insider.
The IRS notes the EITC reaches over 31 million households yearly, or about half of families with children. Using data from the Panel Study of Income Dynamics, the authors found children exposed to the EITC at younger ages had stronger outcomes. The data suggests the effects are also stronger for Black children than white children.
For those between the ages of 25 and 45, the study found that a $1,000 increase in annual exposure to EITC back when they were children led to a 4 percentage point increase in employment, with some evidence pointing to earnings increases for those in the bottom half of the earnings distribution.
It shows how policies that help keep children out of poverty can have benefits for decades after.
"Given the broader literature on the EITC, our paper shows that not only does the EITC reduce poverty in the short term, but it can also help break the cycle of poverty by reducing the likelihood of being poor as an adult among children growing up in low-income households," Michelmore said.
These results were concentrated among children in the second income quartile, which has an average family income of $45,000. There was little evidence of the EITC reducing poverty among children who grew up at the bottom of the income distribution, suggesting the EITC may not be able to benefit those experiencing deep poverty.
The EITC is structured such that people start out eligible for zero benefits if they don't work, and as they earn more labor income, they qualify for more benefits. After a exceeding a certain income level, benefits then drop. How the tax credit can be restructured to assist those who need the benefits the most, though, is murky.
"You have to be working, but you don't want to be working too much, because you essentially start losing some of the maximum benefits," Nicardo McInnis, assistant professor of economics at California State University, Northridge who led the study, told Insider. "For families that don't really have an attachment to the labor market or have a weak attachment, they are not going to be earning sufficient income that qualifies them for the EITC that could potentially make a difference in their kids' lives."
According to the IRS, those who qualify for the EITC must make less than $59,187. Those without qualifying children can claim the EITC between the ages of 25 and 64, and those filing for the EITC can claim up to nearly $7,000 in credits. For a short period during the pandemic, childless qualifiers could file if they were above 19.
Children who grow up in poverty have a higher chance of being poor in adulthood than those who did not grow up in poverty, according to the authors. These findings suggest, though, that the tax credit improves economic outcomes of both the EITC recipients and their children, as the authors found evidence that these effects drive up income mobility.
Past research has shown that previous EITC expansions resulted in higher short-term labor force participation for single mothers, heightened pre-tax earnings, and increased test scores and college enrollment for children.