EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds
End Notes
[1] Indivar Dutta-Gupta and Jimmy Charite co-authored previous versions of this paper.
[2] Hilary Hoynes, “A Revolution in Poverty Policy: The Earned Income Tax Credit and the Well-Being of American Families,” Pathways, Summer 2014, pp. 23-27, http://web.stanford.edu/group/scspi/_media/pdf/pathways/summer_2014/Pathways_Summer_2014.pdf.
[3] David Simon, “Expansions to the Earned Income Tax Credit Improved the Health of Children Born to Low Income Mothers,” London School of Economics, June 9, 2015, http://bit.ly/1du6YrW.
[4] Austin Nichols and Jesse Rothstein, “The Earned Income Tax Credit (EITC),” NBER Working Paper No. 21211, May 2015, http://www.nber.org/papers/w21211.pdf, p. 5.
[5] See also: “Chart Book: The Earned Income Tax Credit and Child Tax Credit,” Center on Budget and Policy Priorities, revised January 16, 2015, https://www.cbpp.org/cms/index.cfm?fa=view&id=5253.
[6] For more on how the EITC operates, see “Policy Basics: The Earned Income Tax Credit,” Center on Budget and Policy Priorities, updated August 20, 2015, https://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit.
[7] The credit value is determined by IRS tables in the Form 1040 instructions that use $50 increments for the filer’s earned income amount. For example, if a filer earned $8,278, the filer would be in the $8,250-$8,300 earnings bracket, which uses $8,275 to calculate the dollar amount for the EITC for all filers with earnings in that bracket.
[8] CBPP calculations based on Internal Revenue Service Compliance Data Warehouse data.
[9] For more on state EITCs, see: Erica Williams and Michael Leachman, “States Can Adopt or Expand Earned Income Tax Credits to Build a Stronger Future Economy,” Center on Budget and Policy Priorities, updated February 18, 2015, https://www.cbpp.org/cms/index.cfm?fa=view&id=4084.
[10] For more on how the CTC operates, see “Policy Basics: Child Tax Credit,” Center on Budget and Policy Priorities, updated August 20, 2015, https://www.cbpp.org/research/policy-basics-the-child-tax-credit.
[11] The CTC begins to phase out at incomes of $75,000 for single parents filing as heads of household, $110,000 for married couples filing jointly, and $55,000 for married couples filing separately. The income level at which the credit phases out completely depends on the number of qualifying children. For example, the credit phases out at $150,000 for married couples filing jointly with two children.
[12] See: Ruby Mendenhall et al., “The Role of Earned Income Tax Credit in the Budgets of Low-Income Families,” Social Service Review, February 2012; Sarah Halpern-Meekin et al., It’s Not Like I’m Poor, University of California Press, January 2015.
[13] For a summary of research on the EITC, see V. Joseph Hotz and John Karl Scholz, “The Earned Income Tax Credit,” in Robert A. Moffitt, ed., Means-Tested Transfer Programs in the United States (Chicago: The University of Chicago Press, 2003) and Bruce Meyer, “The Effects of the Earned Income Tax Credit and Recent Reforms,” in Jeffrey R. Brown, ed., NBER Book Series Tax Policy and the Economy (National Bureau of Economic Research, 2010), http://www.nber.org/chapters/c11973. The refundable CTC is much newer and has not been studied as extensively.
[14] Chris M. Herbst, “The labor supply effects of child care costs and wages in the presence of subsidies and the earned income tax credit,” November 17, 2009, http://www.chrisherbst.net/files/Download/C._Herbst_Labor_Supply_Effects.pdf.
[15] For a longer examination of the trends in female labor force participation, see “Chart Book: TANF at 19,” Center on Budget and Policy Priorities, August 19, 2015, https://www.cbpp.org/research/family-income-support/chart-book-tanf-at-19.
[16] See Bruce D. Meyer and Dan T. Rosenbaum, “Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects,” in Bruce D. Meyer and Douglas Holtz-Eakin, eds., Making Work Pay: The Earned Income Tax Credit and Its Impact on America’s Families (New York: Russell Sage Foundation, 2001); Bruce D. Meyer and Dan T. Rosenbaum, “Welfare, The Earned Income Tax Credit, and the Labor Supply of Single Mothers,” Quarterly Journal of Economics 116(3): 1063-2014; and Nada Eissa and Jeffrey B. Liebman, “Labor Supply Response to the Earned Income Tax Credit,” Quarterly Journal of Economics, May 1996.
[17] Nichols and Rothstein also note that the research finds “effects on hours of work were generally small.” Nichols and Rothstein, p. 40. For further discussion of the effects on hours worked, see footnote 24.
[18] See Meyer and Rosenbaum, “Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects,” and Meyer and Rosenbaum, “Welfare, The Earned Income Tax Credit, and the Labor Supply of Single Mothers.”
[19] Jeffrey Grogger, “The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Head Families,” Review of Economics and Statistics, May 2003. Using different data, in another study, Grogger reaches similar conclusions. Jeffrey Grogger, “Welfare Transitions in the 1990s: the Economy, Welfare Policy, and the EITC,” NBER Working Paper No. 9472, January 2003, http://www.nber.org/papers/w9472.pdf.
[20] Molly Dahl, Thomas DeLeire, and Jonathan A. Schwabish, “Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth,” Institute for the Study of Labor, revised April 2009, http://ftp.iza.org/dp4146.pdf.
[21] Stacy Dickert, Scott Houser, and John Karl Scholz, “The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation,” Tax Policy and the Economy, Vol. 9, MIT Press, 1995. V. Joseph Holt, Charles H. Mullin, and John Karl Scholz also showed that the EITC was an important tool encouraging welfare recipients to enter the labor force. V. Joseph Holt, Charles H. Mullin, and John Karl Scholz, “Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare,” NBER Working Paper No. 11968, January 2006, http://www.nber.org/papers/w11968.
[22] Grogger, 2003.
[23] Molly Dahl, Jonathan Schwabish, Thomas DeLeire, and Timothy Smeeding, “The Earned Income Tax Credit and Expected Social Security Retirement Benefits Among Low-Income Women,” Congressional Budget Office, revised March 5, 2012, http://www.cbo.gov/publication/43033.
[24] Once EITC recipients reach the phase-out range, recipients with no children have their EITC reduced by 8 cents for each additional dollar earned, recipients with one child have their EITC reduced by 16 cents, and recipients with two or more children have their EITC reduced by 21 cents. In theory, the phase-out could discourage additional hours of work among those with incomes in the phase-out range. The only studies to find a reduction in work hours, however, have found such effects to be small. Moreover, those studies generally found such effects only among married EITC recipients, and many analysts believe this effect is likely due largely to the fact that the additional income the EITC provides allows the second earner in some married families to choose to spend more time raising children and less time working out of the home. Analysts across the political spectrum have observed that the fact that the EITC may lead some married parents to make such a choice should not be regarded as an adverse policy outcome. See David T. Ellwood, “The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements,” National Tax Journal, Vol. 53, No. 4, December 2000, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251104.
[25] William N. Evans and Craig L. Garthwaite, “Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health,” American Economic Journal: Economic Policy (6)2, 2014, pp. 258-290. Health indicators include self-reported “excellent” and “very good” health days per month, number of bad mental health days in the past month, and biomarkers of elevated stress levels from physical, blood, and urine tests.
[26] The authors controlled for welfare reform, changes in Medicaid or CHIP income eligibility thresholds, the unemployment rate, and the unique impact that belonging to a particular demographic or socio-economic group, living in a particular state, having a particular number of children, and idiosyncrasies of a particular year might have on the incidence of low birth weights for each group of women in their analysis.
[27] Hilary W. Hoynes, Douglas L. Miller, and David Simon, “The EITC: Linking Income to Real Health Outcomes,” University of California Davis Center for Poverty Research, Policy Brief, 2013, http://poverty.ucdavis.edu/research-paper/policy-brief-linking-eitc-income-real-health-outcomes.
[28] Hilary W. Hoynes, Douglas L. Miller, and David Simon, “Income, The Earned Income Tax Credit, and Infant Health,” NBER Working Paper No. 18206, July 2012, http://www.nber.org/papers/w18206.
[29] Kevin Baker, “Do Cash Transfer Programs Improve Infant Health: Evidence from the 1993 Expansion of the Earned Income Tax Credit,” University of Notre Dame mimeo, 2008, http://economics.nd.edu/assets/24011/baker_paper.pdf; and Kate W. Strully, David H. Rehkopf, and Ziming Xuan, “Effects of Prenatal Poverty on Infant Health: State Earned Income Tax Credits and Birth Weight,” American Sociological Review (August 2010), 1–29, http://www.irp.wisc.edu/newsevents/workshops/2011/participants/papers/15-Strully.pdf.
[30] For a discussion of the research on the impact of early childhood poverty on future outcomes, see Greg J. Duncan and Katherine Magnuson, “The Long Reach of Early Childhood Poverty,” Pathways, Winter 2011, pp. 22-27, http://www.stanford.edu/group/scspi/_media/pdf/pathways/winter_2011/PathwaysWinter11_Duncan.pdf. For a more technical discussion of the evidence, see Greg J. Duncan, Pamela A. Morris, and Chris Rodrigues, “Does Money Really Matter? Estimating Impacts of Family Income on Young Children’s Achievement with Data from Random-Assignment Experiments,” Developmental Psychology (June 2011), pp. 1263–1279.
[31] Michelle Maxfield, “The Effects of the Earned Income Tax Credit on Child Achievement and Long-Term Educational Attainment.” Michigan State University Job Market Paper, November 14, 2013, https://www.msu.edu/~maxfiel7/20131114%20Maxfield%20EITC%20Child%20Education.pdf.
[32] Raj Chetty, John N. Friedman, and Jonah Rockoff, “New Evidence on the Long-Term Impacts of Tax Credits,” Statistics of Income Paper Series, November 2011, http://www.irs.gov/pub/irs-soi/11rpchettyfriedmanrockoff.pdf.
[33] Gordon Dahl and Lance Lochner, “The Impact of Family Income on Child Achievement: Evidence From The Earned Income Tax Credit,” American Economic Review (2012), pp. 1927-1956, http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1927.
[34] Duncan, Morris, and Rodrigues, 2011.
[35] Dayanand S. Manoli and Nicholas Turner, “Cash-on-hand and College Enrollment: Evidence From Population Tax Data and Policy Nonlinearities,” NBER Working Paper No. 19836, January 2014, http://www.nber.org/papers/w19836.
[36] Nichols and Rothstein, p. 39.
[37] Chetty, Friedman, and Rockoff 2011.
[38] The authors refer to pre-tax income here. However, they had fairly similar findings when they re-estimated their models using childhood income after federal income taxes.
[39] The paper says 19 percent, but our calculations, confirmed by one of the authors, show that this is a typographical error and 17 percent is correct. Duncan, Ziol-Guest, and Kalil, 2010.
[40] Kathleen M. Ziol-Guest, Greg J. Duncan, Ariel Kalil, and W. Thomas Boyce, “Early childhood poverty, immune-mediated disease processes, and adult productivity,” Proceedings of the National Academy of Sciences of the United States of America (October 16, 2012), 17289-17293.
[41] Chetty, Friedman, and Rockoff, 2011.
[42] Bureau of Labor Statistics, Occupational Employment Statistics, http://www.bls.gov/oes/current/oes_nat.htm; U.S. Census Bureau, http://www.census.gov/hhes/www/poverty/data/threshld.
[43] For example, over 11 million workers lived below the official poverty line in 2013. Among these workers, the median number of weeks worked per year was 40. The median number of hours worked per week was 35. CBPP analysis of March 2014 Current Population Survey.
[44] Economic Policy Institute, The State of Working America, 12th edition, http://stateofworkingamerica.org/data/.
[45] The figures here contrast job losses between the first quarter of 2008 and the first quarter of 2010 with job gains between the first quarter of 2010 and the first quarter of 2012. The National Employment Law Project defines lower-wage jobs as those with median hourly wages from $7.69 to $13.83 (in 2012 dollars) and mid-wage jobs as those with median hourly wages from $13.84 to $21.13. To place these figures in context, in 2012, the year-round, full-time earnings of a lower-wage job are equivalent to between 66 percent and 119 percent of a two-adult, two-child family’s federal poverty threshold. National Employment Law Project, “The Low-Wage Recovery and Growing Inequality,” August 2012, http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
[46] Harry J. Holzer, Julia I. Lane, David B. Rosenblum, and Fredrik Andersson, Where are All the Good Jobs Going? (New York: Russell Sage Foundation, 2011), p. 17.
[47] CBPP analysis of data from the U.S. Department of Labor, Wage and Hour Division, Bureau of Labor Statistics, http://www.dol.gov/whd/minwage/chart.htm.
[48] For example, the EITC adjusts to reflect family size and income, while the minimum wage doesn’t. The EITC’s pro-work effects may put modest downward pressure on wages, an effect that the minimum wage counters by establishing a wage floor. The EITC is provided as a tax refund that comes once a year and can help with large, one-time expenses, while the minimum wage is reflected in each paycheck. For more, see: Robert Greenstein, “Strengthen Minimum Wage – and EITC,” Center on Budget and Policy Priorities, May 27, 2015, https://www.cbpp.org/blog/strengthen-minimum-wage-and-eitc.
[49] Bureau of Labor Statistics, Occupational Outlook Handbook, http://www.bls.gov/ooh/most-new-jobs.htm. We define the poverty-level wage as the wage level needed to bring a family of four to the poverty line with full-time, year-round work. For 2014, this is $24,008.
[50] CBPP analysis of the Census Bureau’s March 2014 Current Population Survey and SPM public use file. For state-by-state anti-poverty and other numbers relating to the credits, see our state fact sheets at https://www.cbpp.org/research/federal-tax/state-fact-sheets-the-earned-income-and-child-tax-credits.
[51] Hilary W. Hoynes and Ankur J. Patel, “Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income,” NBER Working Paper No. 21340, July 2015, http://www.nber.org/papers/w21340.pdf.
[52] As Hoynes and Patel note, their findings do not reflect any downward pressure on market wages caused by more workers looking for jobs due to the EITC.
[53] Erica Williams, “State EITCs Narrow the Gap Between Rich and Poor,” Center on Budget and Policy Priorities, June 1, 2015, https://www.cbpp.org/blog/state-eitcs-narrow-the-gap-between-rich-and-poor.
[54] The CTC is meant to offset the costs of child rearing and has higher income phase-out levels to reach the broader middle class, so families may receive the CTC for longer periods of time than the EITC.
[55] Dowd and Horowitz, 2011.
[56] While the EITC and CTC can provide a safety net for families over short periods of time, this does not necessarily mean that credits are counter-cyclical (such that the aggregate amount of the EITC and CTC automatically increases in recessions). Researchers have found the EITC’s pro- and counter-cyclical effects overall to be ambiguous, and differ between family types. For example, some families who received a credit may receive a smaller credit or none at all if their incomes drop too low. See Marianne Bitler, Hilary Hoynes, and Elira Kuka, “Do In-Work Tax Credits Serve as a Safety Net?” NBER Working Paper No. 19785, January 2014, http://www.nber.org/papers/w19785.
[57] These findings do not imply that EITC recipients only use the EITC once or twice over their entire working career. Rather, they suggest that the majority of EITC recipients use the credit for short periods at a time. Another study, covering EITC recipients over 2000 to 2006, had similar findings: about 30 percent of EITC recipients over the period claimed the EITC only once, while only 11 percent claimed the EITC each year. Deena Ackerman, Janet Holtzblatt, and Karen Masken, “The Pattern of EITC Claims Over Time: A Panel Data Analysis,” Internal Revenue Service, 2009, http://www.irs.gov/pub/irs-soi/09resconpatterneitc.pdf.
[58] Dowd and Horowitz, 2011.
[59] Carl Davis et al., “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” 5th Edition, Institute on Taxation and Economic Policy, January 2015, http://www.itep.org/whopays/full_report.php.
[60] Citizens for Tax Justice, “Who Pays Taxes in America?” April 7, 2014, http://www.ctj.org/pdf/taxday2014.pdf.
[61] One study finds that taxpayers who claimed the EITC at least once from 1989 through 2006 paid several hundred billion dollars more in federal income taxes over that period than they received in EITC benefits. Note, however, that the research covers a period before the Great Recession and the 2009 EITC expansion and that policy changes since the 1990s have reduced taxes for average taxpayers. Tim Dowd and John B. Horowitz, “The Earned Income Tax Credit: Safety Net or Bootstrap,” National Tax Association Conference on Taxation, Philadelphia, PA, November 21, 2008.