The EITC: What’s at Stake for Small Business?

By at 26 April, 2021, 8:54 am


As part of the American Rescue Plan signed by President Biden, the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) were expanded for one year. As the Biden Administration and Congress propose and debate various approaches to lifting people and families out of poverty, including making these tax credit expansion measures permanent, it is important that entrepreneurs and small business owners understand how the federal government is addressing the issue as many workers benefiting from these programs are employed by small businesses.

Moreover, government programs that work to lift people out of poverty can have a positive effect on employment and enabling entrepreneurship across the income spectrum. Of course, entrepreneurship and new business creation have a positive effect on inclusive wealth creation, not to mention for local economies across the nation working to recover from the economic devastation of the pandemic.

In this blog post, I address the EITC. The CTC will be addressed in a forthcoming piece.

The maximum EITC was increased from $540 to approximately $1,500, and the eligible income cap was raised from $16,000 to $21,000. Moreover, eligibility has been expanded to include workers without children, aged 19-24, and those 65 and over. Students under 24 who attend school part time are excluded.

It is estimated that the expanded EITC without children will support 17.3 million young adults (without children) who work in low-wage jobs.

With regard to workers with children, a recent National Bureau of Economic Research (NBER) report finds that the EITC  – “the cornerstone U.S. anti-poverty program”-  lifts over 5 million children out of poverty each year.  It is only available to those who work and has incentives for non-workers to become employed. In their report, NBER finds “robust evidence that EITC expansions increase the extensive margin of labor supply.”

The EITC has been with us for some time, and its payment levels have expanded as part of various tax acts over the past 46 plus years.

Incentivizing work through income support to over 17 million people who do vital work for many types of small businesses across industry sectors (including 5.8 million people whose income is taxed by the federal government, and one can argue drives them deeper into poverty) should be a bipartisan issue given its effect and impact, which:

● Expands employment and does not reduce labor force participation

● Is available to recipients only if they work

● Has proven itself as an effective anti-poverty program

The ideal employment-policy strategy incentivizes work, and the need for workers is a top issue for small businesses as they ramp up during this recovery period. With growing sentiment on Capitol Hill to allow the current federal boost to unemployment insurance to expire, now is an ideal time to advance a permanent EITC fix that will complement and support small businesses in their efforts to recruit and retain workers. I will add that self-employed people are eligible for the EITC, so if net earnings are low during the startup phase (or a bad year) the credit can provide a safety net for qualified individuals.

As noted by former House Speaker Paul Ryan at a recent AEI-Brookings symposium on the future of the EITC, he said expansion is “preferable” (rather than creating a new federal program) because “we already know about their effects.”

He added that the EITC should be embedded in the paycheck (not at the end of the year) and “technologist” in the federal government “can figure it out.” Beyond recipients experiencing immediate financial support, EITC fraud would also be dramatically reduced (which amounts to approximately $26 billion each year.)

In Congress, Senators Mitt Romney (R-Utah) and Marco Rubio (R-FL) among several other key Republicans  – are active in the EITC/CTC space. As SBE Council works to advocate and support small-business friendly efforts on this issue, we see an opportunity for bipartisan action given current labor shortages, a winding down of supplemental unemployment insurance, and the need for solutions that address poverty and the high cost of living. The EITC is an effective tool that can be refined in order to help workers and families navigate financial insecurity, and “get ahead” at a time of rising costs.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.



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