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Impacts of the Earned Income Tax Credit

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Torrey Pines 1
Hosted By: American Economic Association
  • Chair: Riley Wilson, Brigham Young University

Do EITC Expansions Pay for Themselves? Effects on Tax Revenue and Public Assistance Spending

Jacob Bastian
,
Rutgers University
Maggie R. Jones
,
U.S. Census Bureau

Abstract

This paper studies how behavioral responses to the Earned Income Tax Credit (EITC) affect the program's budgetary cost. The EITC encourages labor supply and increases income, thereby reducing public assistance payments to households and increasing taxes paid by households. These sources of revenue reduce the EITC's net cost. We use administrative Internal Revenue Service tax data linked to Current Population Survey data on enrollment in public assistance programs to estimate the EITC's net cost. The evidence from three decades of EITC policy expansions implies that the EITC decreases public assistance received by mothers and increases payroll and sales taxes paid. Our estimates suggest that the EITC has a self-financing rate of 83 percent, so that the EITC's true cost is only 17 percent of the budgetary cost. Although the EITC is one of the largest and most important public assistance programs in the U.S., we show that the EITC is actually one of the least expensive anti-poverty programs in the U.S., costing taxpayers less than the school lunch and breakfast programs.

TOTS AND TEENS: HOW DOES CHILD’S AGE INFLUENCE MATERNAL LABOR SUPPLY RESPONSE TO THE EARNED INCOME TAX CREDIT?

Katherine Michelmore
,
Syracuse University
Natasha Pilkauskas
,
University of Michigan
Rick Rodems
,
University of Michigan

Abstract

Building on earlier work that shows that the Earned Income Tax Credit (EITC) has a substantial positive effect on maternal labor supply, we show that labor supply effects are concentrated among mothers with children under age three, with only moderate effects of the EITC on the labor supply of mothers with teenagers. These increases in labor supply are coupled with large increases in the use and cost of child care among mothers with children under age three. Decomposition analyses suggest that the EITC explains more than half of the increase in single mother’s labor supply from 1990 to 2000 among mothers with infants. Results highlight the importance of considering heterogeneous treatment effects of policy and raise implications for child care policy and other family policy.

The Impact of Social Networks on EITC Claiming Behavior

Riley Wilson
,
Brigham Young University

Abstract

Social networks have the potential to affect labor market decisions and program participation. Using the Social Connectedness Index (Bailey et al., 2018) to capture county-to-county Facebook linkages, I explore what happens to county-level Earned Income Tax Credit (EITC) claiming behavior when the county's out-of-state social network is exposed to a newly implemented state EITC. When the number of out-of-state friends exposed to a state EITC increases the composition of EITC claims shifts toward more EITC households claiming self-employment income. The income distribution of EITC claiming households also shifts, moving away from the tails of the EITC credit, towards the income level that generates the largest EITC credit. This mimics the direct impacts of state level EITC policies on filing behavior, consistent with social networks providing information or increasing salience about EITC policy.

The Dynamics of Earned Income Tax Credit Eligibility

Jessamyn Schaller
,
Claremont McKenna College
Ann Huff Stevens
,
University of California-Davis
Chloe N. East
,
University of Colorado-Denver

Abstract

The Earned Income Tax Credit (EITC) has become one of the primary components of the U.S safety net for poor families, but very little is known about the dynamics and persistence of EITC eligibility. This paper uses data from the Panel Study of Income Dynamics (PSID) to measure persistence of eligibility for the EITC, paying particular attention to persistence across multiple spells of eligibility. We find that single-female headed households have extremely persistent eligibility for the EITC, with two-thirds of these families becoming eligible for the credit maintaining their eligibility for five or more years over the subsequent decade. When considering all household types just beginning a spell of eligibility, we find that over half are eligible for more than five years in the next decade. These results point to substantially more persistence in EITC eligibility than prior work based in IRS administrative data. This is due to both our consideration of multiple spells of eligibility and to the ability to follow single parents across transitions in marriage and household structure in the PSID.
Discussant(s)
Reagan Baughman
,
University of New Hampshire
Amanda Agan
,
Rutgers University
David Simon
,
University of Connecticut
Sara LaLumia
,
Williams College
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • I3 - Welfare, Well-Being, and Poverty