EITC Expansion Research Articles

Do EITC expansions pay for themselves? Effects on tax revenue and government transfers

This paper calculates the EITC’s net cost by estimating effects, both direct and through recipients’ behavioral changes, on tax revenue and government transfer spending. We show that the EITC increases labor supply and income, thereby increasing the taxes households pay and reducing the government transfer payments they receive. Using linked IRS–CPS data and several EITC policy changes, and focusing on married and unmarried women, we find that the EITC’s net cost is only 17 percent of the ($70 billion) budgetary cost over a one-year period. Although the EITC is one of the U.S.’s largest and most important public assistance programs, the EITC is actually one of the U.S.’s least expensive anti-poverty programs.

The Long-Term Impact of the Earned Income Tax Credit on Children's Education and Employment Outcomes

Using four decades of variation in the federal and state Earned Income Tax Credit, we estimate the impact of the EITC on education and employment outcomes on children exposed to EITC expansions in childhood. Reduced-form results suggest that an additional $1,000 in EITC exposure when a child is 13 to 18 years old increases the likelihood of completing high school (1.3 percent), completing college (4.2 percent), being employed as a young adult (1.0 percent), and earnings by 2.2 percent. Instrumental variables analysis reveals that the primarily channel through which the EITC improves education and employment outcomes among children is through increases in pre-tax family income.

Single Motherss EITC Receipt Dynamics

This paper uses a 1987-2006 panel of tax returns to examine how EITC claiming behavior among single mothers changed following the 1990s EITC expansions and the passage of welfare reform. We find that the continuation rate of being a claimant increased, while exits to non-primary-filer status decreased (particularly among longer-term claimants). Entrants from non-primary-filer status increased as well. We find that the increase in the EITC maximum helps to explain much of the increase in continuation rates, while the reduction in AFDC/TANF maximum benefits and the increase in maximum EITC amounts help to explain the decrease in exits to non-primary-filer.

Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes?

This paper studies the impact of income taxes on intensive and extensive labor supply decisions for older workers. The literature provides little evidence about the responsiveness of the older population to tax incentives, though the tax code is a potentially important mechanism for affecting retirement behavior. We estimate the intensive and extensive margins jointly with a new approach accounting for selection into labor force participation. On the extensive margin, we find substantial effects of income taxes on labor force participation and retirement decisions, estimating participation elasticities with respect to after-tax labor income of 0.76 for women and 0.55 for men. About half of the magnitude of these labor force participation elasticities are associated with tax-driven reductions in retirement. We find statistically insignificant compensated elasticities on the intensive margin. We simulate the effects on labor sup- ply of two possible age-targeted tax reforms. We find that eliminating the employee portion of the payroll tax at age 65 would decrease the percentage of workers exiting the labor force by 6-7%. An EITC expansion which extends the tax credit to older ages (irrespective of their number of dependents) would decrease the probability that workers exit the labor force by 3 percentage points for men and by 6 percentage points for women, reductions of 11% and 23% from baseline rates.

The 1993 EITC Expansion and Low-Skilled Single Mothers’ Welfare Use Decision

Previous studies on low-skilled single mothers focus generally either on the binary welfare use or work decision. However, work among welfare participants has increased steadily since the mid 1990s. This study estimates role of the 1993 EITC expansion on the decline of welfare caseloads using a bivariate probit model. Using monthly SIPP information, I find that the 1993 EITC expansion has at least the same effect on reducing welfare use as the welfare reform initiatives. Moreover, the elasticity estimates indicate that single mothers, especially those who were not employed and dependent solely on welfare before the expansion, were the most responsive to the policy initiatives. Finally, the increase in work among welfare participants is due to the relative ineffectiveness of the policies in reducing the net population of those who are on welfare and work simultaneously.

The Earned Income Tax Credit and Reported Self-Employment Income

The Earned Income Tax Credit subsidizes earnings from both the wage sector and the self-employment sector. This paper uses tax return data to investigate how the EITC affects the reporting of self-employment income to the IRS. A difference-in-difference strategy is used, considering three expansions in the EITC and comparing changes across filers with and without children. The expansions are predicted to increase the reporting of self-employment income for those in the phase-in region of the EITC and to reduce the reporting of self-employment income for those in the phase-out region. Among the lowest-income filers, the 1994 EITC expansion is associated with a significant increase in the probability of reporting positive self-employment income, equal to 3.2 percentage points for unmarried filers and 4.1 percentage points for married filers.

Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth

While many studies have found that the EITC increases the employment rates of single mothers, no study to date has examined whether the jobs taken by single mothers as a result of the EITC incentives are "dead-end" jobs or jobs that have the potential for earnings growth. Using a panel of administrative earnings data linked to nationally representative survey data, we find no evidence that the EITC expansions between 1994 and 1996 induced single mothers to take "dead-end" jobs. If anything, the increase in earnings growth during the mid-to-late 1990s for single mothers who were particularly affected by the EITC expansion was higher than it was for other similar women. The EITC encourages work among single mothers, and that work continues to pay off through future increases in earnings.

The Happiness of Single Mothers after Welfare Reform

U.S. welfare programs were transformed over a decade ago. The changes were life altering for those on welfare, or prone to be. What was the impact on happiness? Using data from the General Social Survey and World Value Survey, a Difference in Difference test is performed. Specifically, the change in single mothers’ happiness before and after welfare reform is compared to the change in happiness of four comparison groups. Welfare reform appears to increase happiness (predominantly by decreasing reports of low levels of happiness). The results are robust to various specification checks. Alternate explanations, e.g., the EITC expansion, are considered.

Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth

While many studies have found that the EITC increases the employment rates of single mothers, no study to date has examined whether the jobs taken by single mothers as a result of the EITC incentives are dead-end jobs or jobs that have the potential for earnings growth. Using a panel of administrative earnings data linked to nationally representative survey data, we find no evidence that the EITC expansions between 1994 and 1996 induced single mothers to take dead-end jobs. If anything, the increase in earnings growth during the mid-to-late 1990s for single mothers who were particularly affected by the EITC expansion was higher than it was for other similar women. The EITC encourages work among single mothers, and that work continues to pay off through future increases in earnings.

Evaluating the Impact of the Earned Income Tax Credit on Health Insurance Coverage

The goals and design of the Earned Income Tax Credit suggest that it has the potential to affect private health insurance coverage rates in its target population through income, tax price and employment effects. Results from an analysis using data from the National Longitudinal Survey of Youth show that the EITC expansion of the mid-1990s did increase the rate of employer-based health insurance coverage in the low-skilled population. The overall effect of EITC expansions was to increase the probability of coverage by 3.8 percentage points, or approximately 375,000 more individuals who were covered by employer-provided policies between 1992 and 1998.

Tax-Transfer Policy and Labor-Market Outcomes

The Earned Income Tax Credit provides nearly $40 billion to low-income families with children. A potential unintended consequence of the credit is lower pretax wages, in which case only part of the subsidy would accrue to workers. We examine the extent to which EITC expansions lower the pretax wages of working parents. Our findings are inconclusive. The gross hourly wages of less-skilled single women are found not to vary by the number of children, as does the EITC. In addition, the wages of black single mothers track the minimum wage for nearly the entire time period.

Distinguished Lecture on Economics in Government—Fighting Poverty: Lessons from Recent U.S. History

Welfare reform efforts in the 1990s aimed at reducing welfare dependence and moving women into work. Public assistance use fell and labor force participation among mothers rose at a stunning rate over the decade. Poverty declined, but at a slower rate. These changes are causally related to the strong macroeconomy, welfare reform efforts, and other policy changes, especially the EITC and minimum wage expansions. This paper concludes that all of these effects reinforced each other, producing very large behavioral changes. It is too early to predict the effects of these changes on long-term family well-being.