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Title: Effective Policy for Reducing Inequality: The Earned Income Tax Credit and the Distribution of Income

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: In this paper, we examine the effect of the EITC on the employment and income of single mothers with children. We provide the first comprehensive estimates of this central safety net policy on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 5.6 to 7.8 percentage point increase in employment and a 5.4 to 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. These results are robust to a rich set of controls and to whether we limit our analysis to the sharp increase in EITC due to the 1993 expansion or use the full period of policy expansion, back to the 1986 Tax Reform Act. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. Importantly, by capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.

Url: http://www.montana.edu/econ/documents/hilaryhoynesseminar.pdf

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Authors: Hoynes, Hilary W.; Patel, Ankur J.

Publisher: University of California

Data Collections: IPUMS CPS

Topics: Other, Poverty and Welfare

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