The Effect of Income on Educational Attainment: Evidence from State Earned Income Tax Credit Expansions

Abstract

As of the early 2000s, the gap in college enrollment between children growing up in the highest income quartile and the lowest income quartile was over 50 percentage points (Bailey and Dynarski 2011). There is much debate in the literature about what role household income plays in producing this gap. A major impediment in studying this question is the lack of plausibly exogenous variation in income. The Earned Income Tax Credit (EITC) is one potential source of exogenous variation in household income that may increase educational attainment among low-income youth. Using variation in state EITC benefit generosity, I use a difference-in-difference framework to analyze how an increase in household income affects the educational attainment of children from low socioeconomic status households. Conservative estimates suggest that following an increase in the maximum EITC by $1,000, 18-23 year olds growing up in likely EITC- eligible households are 1 percentage point more likely to have ever enrolled in college and 0.3 percentage points more likely to complete a bachelor’s degree. These results are concentrated among individuals who were younger than 12 at the time of state EITC implementation, suggesting that the EITC increases educational attainment primarily by providing extra income to households with young children. I find no effect of EITC expansions on older children, for whom the EITC acts as a form of financial aid.