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Budget Header 2011

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Expand the Earned Income Tax Credit

The economic stimulus act (“American Recovery and Reinvestment Act of 2009”) increased the earned income tax credit rate for working families with three or more children from 40 percent to 45 percent for two years, thus raising the maximum credit for families with three or more children from $5,036 to $5,666 in 2010. The act also increased the phaseout income levels for all married couples filing a joint tax return (regardless of the number of children) to $5,000 above the thresholds for single filers. The president proposes to extend the higher credit rate for one year and to make permanent the higher phaseout threshold for married couples filing jointly.1

The higher credit rate for larger families could induce them to work more although research suggests any impact would be small. Lengthening the phaseout range would change which families face higher marginal tax rates because of the phaseout but have only small effects on overall work effort. The main effect of the proposal would be to increase after-tax incomes of affected families.

1.The president would include the $5,000 higher phaseout threshold in his budget baseline. In his 2010 budget, the president proposed indexing the $5,000 amount for inflation. Budget materials for 2011 do not address the question of indexing that parameter.

Additional Resources
Tax Policy Briefing Book: Taxation and the Family: What is the Earned Income Tax Credit?
Stimulus Act Report Card: Increase in Earned Income Tax Credit