The Earned Income Tax Credit: An Unconventional Income Approach

 

(June 2012) Dr. Milton Friedman, the 1976 Nobel Economics Laureate advanced the idea of a negative income tax.  He argued "outright cash grants" were more efficient than welfare bureaucracies. 

 

Summary

 

President Richard Nixon proposed a negative income tax.  His proposal was antecedent to the federal Earned Income Tax Credit (EITC), part of a tax reduction act signed into law by President Gerald R. Ford.  Every Democratic and Republican President since Ford has supported the EITC. The IRS administers the EITC, and estimates one in five eligible nationwide do not claim it. The IRS does not provide state estimates but the Arkansas awareness problem is illustrated by county low-income and EITC returns.  IRS VITA and TCE sites are solutions.

 

Another way to address the awareness problem is to explain to Arkansas leaders that the EITC is an unconventional income approach.  The EITC is a positive transfer whose refundable portion is included by the federal government in state personal income.  One economic policy goal for Arkansas is to achieve 100 percent income parity with the U.S.  Arkansas has improved from its multi-decade range of 75-to-79 percent (1973 to 2006) to 82 percent (2009-11), an all-time record.  Income effects from increased EITC participation ($72-to-$118 million) will not significantly increase, in a single year, Arkansas' percentage rank versus the U.S.  But improved EITC participation could complement strategies that seek to improve Arkansas to 100 percent income parity.

 

Please contact the Policy Foundation for a copy of this 10-page report by Greg Kaza.