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Economic Perspectives, Vol. 32, 2nd, 2008
How Do EITC Recipients Spend their Refunds?
The earned income tax credit (EITC) is one of the largest sources of public support for lower-income working families in the U.S. The EITC operates as a tax credit that serves to offset the payroll taxes and supplement the wages of low-income workers. For tax year 2004, the EITC transferred over $40 billion to 22 million recipient families (U.S. Internal Revenue Service, 2006b). Nearly 90 percent of program expenditures come in the form of tax refunds; the remaining 10 percent serve to reduce tax liability. While other income support programs distribute benefits fairly evenly across the calendar year, EITC payments are concentrated in February and March when tax refunds are received. Because the EITC makes one relatively large payment per year, it may provide low-income, credit-constrained households with a rare opportunity to make important big-ticket purchases.
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