The tax system has a pervasive impact on poverty, both directly through its role in the distribution of society’s resources and indirectly through its effects on the incentives for economic decisions like working and saving. The two most important facets of the tax system for low-income families are payroll taxes and the Earned Income Tax Credit (EITC), the former of which levies a tax on earned income and the latter provides a tax credit for earned income.
Underlying the persistence of poverty has been wage stagnation at the bottom. From 1973-2003, real hourly wages for men at the 10th percentile of the earnings distribution fell 3 percent. At the same time, median wages fell 1 percent and wages for workers at the 90th percentile rose 22 percent. The economic blow for families at the bottom of the income spectrum was partially cushioned by several expansions in the EITC
The EITC has several limitations that could easily be addressed by strengthening the credit.
clipped from: www.cbpp.org 