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Effectiveness and limitations of the Earned Income Tax Credit for reducing child poverty in the United States

By Mary Keegan Eamon, Chi-Fang Wu and Saijun Zhang

Abstract

Based on international comparisons, the United States has a high child poverty rate. The Earned Income Tax Credit (EITC), which provides a tax benefit to low-income working households and was expanded after the 1990s welfare reform, is currently this country's largest cash transfer program for low-income families with children. This article examines the historical components of the EITC. We then analyze the program's child poverty reduction effectiveness by comparing the percent and percentage point declines in the child poverty rate accounted for by the EITC benefit for six years between 1996 and 2005. Figures for the first four years were drawn from previous studies, while figures for the final two years were estimated with a U.S. Census Bureau calculator. All of the analyses used Current Population Survey data. We determined that the percent decline in the child poverty rate attributed to the EITC generally increased during this period (highest percent was 19.5 in 2005), while the percentage point decline remained relatively stable. We then critically examine four poverty reduction assumptions of the EITC that limit its ability to further reduce child poverty and draw social policy implications.EITC Earned Income Tax Credit Child poverty EITC poverty reduction effects Welfare reform

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