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New Report: Policy Changes to Earned Income Tax Credit and Child Tax Credit Could Narrow Racial Wealth Gap

The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) could be used by the government to help close the wealth gap, according to a newly released report by DC-based think tank Brookings Institution.

White households, on average, have six or seven times more wealth than Black households. Instead of the racial wealth gap narrowing over time, it has grown during the last 30 years.

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According to the Brookings report, while there are many proposed policies aimed at addressing this disparity, such as savings programs, retirement income efforts, and “baby bonds,” EITC and CTC “offer chances to increase income and financial stability across a person’s lifetime.” Therefore, policies that reform both the EITC and CTC would decrease the racial wealth gap.

Some consider the EITC to be one of the most important anti-poverty programs in the country. In 2021, it provided benefits to 25 million workers and families. Both Black and white households benefit from EITC because it increases the checking and savings account balances among low-income households, especially among single mothers. The EITC lowers income inequality between Black and white households by about 5 to 10 percent annually, Brookings found.

However, under current law the EITC may not narrow the racial wealth gap, as it could actually widen it since it also increased white household wealth. Brookings suggests “policy changes that would extend both expansions would help thousands of Black workers, especially young Black workers, and would be an important step in alleviating poverty for the only group that is taxed into poverty,” low-income childless adults. Still, this is a definitive way alone to close the wealth gap, says the nonprofit organization.

“Expanding eligibility for and increasing the ‘childless’ EITC would help thousands of low-income Black workers, especially those at the beginning of their careers, although it carries fewer implications for the racial wealth gap. A serious consideration of these provisions would help take full advantage of these anti-poverty programs’ potential for racial equity,” the report states.

CTC is only partially refundable under current law, leaving the lowest-income households eligible for only a portion of the credit. The American Rescue Plan Act of 2021 made the CTC fully refundable for 2021. But according to Brookings, if CTC were permanently made fully refundable, it would have significant positive equity impacts on experiences of poverty.

“Black children are far more likely to live in poverty than white children are, making the CTC and its refundability particularly important for Black children. While three-quarters of white children are eligible for the full CTC benefit, only half of Black children are. However, under a fully refundable credit, 99 percent of Black children would be eligible for the full CTC, and racial gaps in eligibility would be completely eliminated — in other words, much of the inequality in CTC eligibility stems not from Black children being better off, but from their being, on average, worse off than their white peers,” states the report.

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