Cato has released a brief study on the earned income tax credit (EITC). The EITC is a huge program. In 2015 it will provide an estimated $69 billion in benefits to 28 million recipients.
The EITC is administered through the tax code, but it is mainly a spending program. The EITC is “refundable,” meaning that individuals who pay no income taxes are nonetheless eligible to receive a payment from the U.S. Treasury. Of the $69 billion in benefits this year, about 88 percent, or $60 billion, is spending.
Articles by liberal and conservative pundits regarding the EITC often make it seem as if there are few downsides to the program. But there is no free lunch with subsidies. The EITC has major costs and shortcomings.
The program has a high error and fraud rate, and for most recipients it creates a disincentive to increase earnings. Also, because the refundable part of the EITC imposes a $60 billion cost on other taxpayers, it reduces their incentives to work, invest, and pursue other productive activities.
The study concludes that the costs of the EITC are likely higher than the benefits. As such, the program should be cut, not expanded.