Earned Income Credit (EITC): Lessons for Australian Taxpayers

The Earned Income Credit (EITC) is one of the most significant anti-poverty tax policies in the United States, delivering billions of dollars in refunds to working families every year. While Australia’s tax system is quite different, the EITC offers lessons in supporting working Australians, especially as debates over the cost of living and family support heat up in 2025.

What Is the Earned Income Credit (EITC)?

First introduced in 1975, the EITC is a refundable tax credit available to low and moderate-income workers in the US, particularly those with children. The size of the credit depends on income level, marital status, and the number of dependent children. In the 2025 US tax year, the EITC can be worth up to USD $7,830 for families with three or more children.

• Refundable: Even if your tax liability is zero, you can receive the full value of the credit as a tax refund.

• Income Limits: For 2025, families with incomes up to about USD $63,398 (married, three kids) may qualify.

• Work Incentive: Only those with earned income (wages, salary, self-employment) are eligible—discouraging unemployment traps.

The EITC is widely credited with reducing poverty, especially among single-parent households, and boosting workforce participation.

Does Australia Have an EITC Equivalent?

Australia does not have a direct EITC-style refundable tax credit. However, there are several support mechanisms for low-income earners and families:

• Family Tax Benefit (FTB): Paid directly to eligible families with dependent children, FTB is means-tested and not tied directly to employment income.

• Low Income Tax Offset (LITO) & Low and Middle Income Tax Offset (LMITO): These reduce the amount of tax low and middle-income earners pay, but are not refundable. If your tax liability is zero, you don’t receive extra money back.

• Working Credit: Incentivises social security recipients to take up paid work, but is less generous and more complex than the EITC.

In 2025, with the Stage 3 tax cuts and other cost-of-living relief measures, there’s renewed policy debate over how best to support working families. Some economists have floated the idea of a refundable tax credit similar to the EITC, especially as welfare reforms and childcare subsidies are being re-examined.

Why the EITC Matters for Australian Policy

The EITC’s success in the US offers several key takeaways for Australian policymakers and taxpayers:

• Targeted Support Boosts Workforce Participation: By rewarding earned income, the EITC encourages work without penalising recipients for moving off welfare.

• Refundability Reduces Poverty: Direct refunds put cash in the hands of low-income households, which can be more effective than non-refundable offsets.

• Administrative Simplicity Is Crucial: The EITC is delivered through the annual tax return, minimising bureaucracy. Australia’s complex patchwork of benefits could benefit from similar streamlining.

Real-world research from the US shows that EITC payments are often used for essentials—rent, groceries, utilities, and paying down debt. This not only reduces poverty, but also stimulates local economies.

What Could a ‘Down Under EITC’ Look Like?

Imagine an Australian version: a refundable tax credit paid through the ATO, targeted at working families earning below a certain threshold. This could replace or supplement existing offsets, and work alongside direct family payments. In 2025, as the government reviews welfare, tax, and cost-of-living policies, this idea is gaining traction among some think tanks and social advocates.

Potential benefits include:

• More direct support for working parents, especially single mothers.

• Reduced reliance on complex Centrelink payments and income tests.

• Stronger incentives to move from welfare to work.

Of course, there are challenges: ensuring the credit is well-targeted, preventing fraud, and balancing fiscal sustainability. But the EITC model shows it’s possible to deliver meaningful, efficient support to those who need it most.