Tax Foundation charts benefits in ending Earned Income Tax Credit

{mosads}The study estimates if rates are kept the same, eliminating the tax credit would raise $56 billion annually, an amount that goes more than half way toward replacing the $109 billion in automatic budget sequester cuts.

If the full rate cut is implemented, revenue would increase by $29 billion if dynamic scoring, which taxes economic growth effects into account, is used, the Foundation estimates. 

The Tax Foundation is a free-market-oriented group with ties to conservative organizations. It does not advocate policy positions, however.

The report argues that the tax credit encourages work for very low wage individuals but serves to discourage work for those making more because the refundable credit phases out.  

Because of this, eliminating the Earned Income Tax Credit would increase employment by 274,000 full-time equivalent jobs.  Eliminating it and lowering tax rates by 5.7 percent across the board would create 783,000 jobs, the study says. The jobs would come in a five to 10 year timeframe, study author Michael Schuyler said.

“We are just pointing out that the way they have designed it, it has these perverse incentives … and we’re asking them, ‘What are you going to do about it?’” co-author Stephen Entin said. 

The tax credit is on the table as Senate Finance and House Ways and Means committees prepare to markup tax reform proposals this fall. 

The Government Accountability Office has estimated that as much as 20 percent of Earned Income Tax Credit payments may be fraudulent, so it has come under scrutiny.

The refundable tax credits are especially popular with Democrats, so in the absence of a huge reduction in tax breaks for the wealthy, it is hard to foresee President Obama eliminating the tax credit.

Liberal scholars at the Center on Budget and Policy Priorities said Tuesday that the study is flawed.

CBPP tax policy director Chuck Marr said that most studies have concluded that the EITC actually increases net employment by encouraging work at the low end.  He said the EITC lifts 9 million people out of poverty and eliminating it to lower rates would redistribute wealth to the top income bracket.

“You would be taking thousands of dollars away from fast food workers and giving it to those making $500,000 or $1 million…It’s rather cruel,” Marr said.