Earned Income Tax Credit

In 1991, more than 13 million low-income households with children claimed more than $11 billion in earned income tax credit payments. Recent legislation raised the credit for one child, introduced a higher credit rate for families with more than one child, and provided two supplemental credits. Today, low-income workers with children have a reduced, and in some cases a negative, tax burden because of the earned income tax credit. The credit appears to provide positive work incentives for the poorest workers and negative work incentives for near-poor workers; the net effect may be a small reduction in work effort. In recent years, the Internal Revenue Service's (IRS) administration has been made easier in some ways and more difficult in others. Although GAO does not believe that the earned income schedule is necessary, certain legislative changes could make it completely redundant. Congress should at least eliminate the interactions in the supplemental credits if not the supplemental credits themselves. Congress should also revise the rules for claiming a dependent to conform with the rules for claiming a qualifying child for earned income credit purposes. Potential recipients and IRS would then be able to determine earned income credit eligibility from the tax return itself.