Who's Afraid of Redistribution? An Analysis of the Earned Income Tax Credit

In the 2008 Presidential campaign, the American public was reminded time and again of the differences in the economic policies of the nominees: John McCain would cut taxes, and Barack Obama would raise them, although only on those earning over $250,000. In the final days of the campaign, the McCain camp accused Obama of proposing “redistribution,” and the Obama camp quickly denied that description. So why do presidential candidates run so quickly from the r-word? McCain’s senior policy advisor equated redistribution with socialism, but redistribution, in the form of the federal income tax system, is a central tenet of American democracy. Indeed, the very notion of having a tax system at all – in which amounts are collected from certain members of society in order to benefit other members – fits a classic definition of redistribution.

One central element of the American version of redistribution comes in the form of the Earned Income Tax Credit (the “EITC”). In his campaign platform, Barack Obama vowed to expand the EITC, making it available to more taxpayers than ever before. Given the outcome of the 2008 election, and President Obama’s seeming commitment to the tenets of redistribution (despite his disavowal of the word) and his express promise to expand the reach of the EITC, as well as the recent changes to the EITC introduced by the American Recovery and Reinvestment Act of 2009 (the “ARRA”), it seems a perfect time to look at the intent behind, and accomplishments of, the EITC as it currently stands, and the role it can (and will) play in the future of the U.S. federal income tax system.

I begin this article with a review of the history of the EITC and an examination of the form it currently takes. I then turn to a review of some of the difficulties presented by the EITC, and some recurring criticisms it has faced since its inception. In the context of this discussion, I also introduce responses to those criticisms, both within the framework of the EITC as it is currently administered and in the form of possible adjustments that might serve to improve the system.