As mentioned, I’m all revved up for testimony I’m giving tomorrow on work and the safety net. I’ll post the testimony soon, but until then, this cool blog by my CBPP colleague Indi Dutta-Gupta will have to tide you over.
It’s all about the Earned Income Tax Credit, a wage subsidy that adds between 34-45% to the earnings of low-income, working parents up to income levels of about $17,000 bucks, at which point it begins to fade until fully phasing out at around $40K (the maximum benefit ranges from about $3.2K-$6K for parents with kids). As Indi points out, the research on this refundable tax credit (along with the smaller, and similarly helpful Child Tax Credit) shows it to encourage work and lower poverty. But what’s new and really interesting are the generational effects on later employment and earnings uncovered by recent research taking advantage of the fact that this thing’s been around long enough now that we can track impacts of kids who grew up in beneficiary families relative to similarly low-income kids whose parents didn’t benefit from the credit. Remarkable stuff, at one level…common sense, at another.
Encouraging work. Numerous studies have found that the EITC promotes work. “[T]he overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers,” write economists Nada Eissa of Georgetown University and Hilary Hoynes of the University of California, Davis. In fact, while policymakers often point to the 1996 welfare law’s creation of Temporary Assistance for Needy Families (TANF) as the primary reason for increased work among single mothers, the research indicates that expansion of the EITC had a larger effect than the welfare law in producing these gains.
Reducing poverty. The EITC and CTC lifted 9.2 million people — including 4.9 million children — above the poverty line in 2010, under a broad measure of poverty that counts refundable tax credit payments as income (and subtracts income and payroll taxes). (See graph.) Improvements in these credits enacted as part of the 2009 Recovery Act are responsible for lifting 1.6 million of those people above the poverty line.
Providing a short-term safety net. Most EITC recipients claim the credit only temporarily when a job disruption or other significant event reduces their income. A recent study found that, of people who received the EITC over an 18-year period, 61 percent received the credit for only one or two years at a time. A forthcoming study finds that over time, EITC recipients as a whole pay far more in federal income taxes than they receive in EITC benefits.
Improving children’s school performance and increasing their work effort and earnings as adults. A small but growing body of research indicates that lifting the incomes of low-income families helps children in those families do better in school. The added income may help children later in life, as well: recent research finds that raising a poor family’s income by $3,000 a year (a fairly typical amount for a poor family to receive from the CTC and EITC) between a child’s prenatal year and fifth birthday is associated with a significant increase in the child’s earnings in adulthood. The leading study finds a 17 percent increase in earnings in adulthood, and an average of 135 hours of additional work per year, compared to similar children whose families do not receive the increase in income.