MarketWise magazine strives to foster partnerships, build capacity, and promote community economic development through "success stories" of creative financing products for affordable housing and small businesses, and innovative revitalization efforts for residents and communities.

MarketWise magazine features current programs and initiatives that — in accord with safe and sound banking principles — creatively, effectively, and profitably meet the credit and informational needs of low- and moderate-income individuals, neighborhoods, and small businesses.

The mission of MARKETWISE is to provide both progressive and practical information about community economic development that supports economic growth in the Fifth District. The Fifth District consists of Mary land, North Carolina, South Carolina, Virginia, most of West Virginia and the District of Columbia.

MARKETWISE is published two times a year by the Federal Reserve Bank of Richmond. Free subscriptions and additional copies are available upon request.

Download MarketWise magazine, Spring 2007

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EITC Achieves Gains But Challenges Remain
By Dr. Lucy Gorham, Director, EITC Carolinas Initiative, MDC, Inc.

With the tax season complete, filers find themselves in two categories; those who pay the government back and those who receive refunds. But for lowincome workers who file taxes, the season brings even more rewards, especially if they’ve claimed the Earned Income Tax Credit (EITC).

First enacted in 1975 under President Gerald Ford, the EITC is a federal tax credit for low-income workers. The EITC offsets the impact of employment taxes paid by low-wage workers and is also designed to “make work pay” by rewarding employment over public assistance.

Based on a recent Treasury audit, the federal government spent $31 billion for the EITC, making it the nation’s largest anti-poverty program. This outlay surpassed federal government spending for food stamps—$19 billion, and Temporary Assistance to Needy Families, the replacement for welfare—$21 billion. Recent data find that each year the EITC lifts roughly five million people out of poverty, almost half of them children. Families often use the EITC refund to pay for home repairs and transportation. In some cases, recipients use the refunds to help boost their earning potential by investing in additional education or training.

President Ronald Reagan and his successors Bill Clinton and George Bush each expanded the EITC, which continues to receive strong bipartisan support. When signing the Tax Reform Act of 1986, which included budget increases for the EITC, President Reagan called the legislation “the best anti-poverty bill, the best pro-family measure and the best job creation measure to come out of the Congress of the United States.”

President’s Message

In 2006, we at the Federal Reserve Bank of Richmond began a process to make MARKETWISE more useful. We convened a focus group and have made changes consistent with our readers’ feedback. The “new and improved” MARKETWISE will serve not only as a primary information resource on community development issues but will also serve as a bridge between broader economic policy issues and the specific challenges that community development practitioners face throughout the District.

In our inaugural redesigned issue, we focus on the Earned Income Tax Credit (EITC), a federal program that highlights the intersection between economics and community development. The EITC provides a tax reduction for eligible lower-income working households.

The intent is to offset the load of social security taxes to provide an incentive for people to work. So how does a subsidy program relate to economics? Something like the EITC was proposed in 1962 by renowned economist Milton Friedman, a proponent of the negative income tax and ardent supporter of free markets.

Realizing that market forces cannot always ensure a distribution of income that society finds satisfactory, Friedman proposed the tax to replace multiple welfare programs with just one lump sum payout of cash. His exact proposal was never adopted, but Congress created the EITC, which is essentially the same idea except that only people who are employed receive the benefits.

I think it is noteworthy that this credit has been popularized and embraced by both sides of the political aisle. The EITC program is about getting the incentives right. And that’s something that both economists and community development practitioners can agree on.

JEFFREY M. LACKER, President
Federal Reserve Bank of Richmond

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The mission of MARKETWISE is to provide both progressive and practical information about community economic development that supports economic growth in the Fifth District. The Fifth District consists of Maryland, North Carolina, South Carolina, Virginia, most of West Virginia and the District of Columbia.

MARKETWISE is published two times a year by the Federal Reserve Bank of Richmond. Free subscriptions and additional copies are available upon request.

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