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Expanded EITC May Offer New Lessons in Labor Economics

Bill Clark/CQ Roll Call File Photo
The earned income tax credit is still one of the few government social welfare programs that is popular with both Democrats and Republicans. Rubio is working on legislation in the Senate to alter the program but leave its basic structure intact.

The EITC dates back to the 1970s, when it was enacted during the administration of President Gerald R. Ford. Over the years, it has found support on both sides of the aisle, which prompted expansions of the program in the Reagan and Clinton administrations.

More recently, the 2009 stimulus boosted benefits, which were extended in early 2013 under the fiscal-cliff deal.

Today, the EITC is one of the few government social welfare programs that is still in the good graces of both Democrats and Republicans. In his enumeration of government anti-poverty programs released this week, Ryan singled out the EITC as “an effective tool for encouraging and rewarding work among lower-income individuals, particularly single mothers.”

Sen. Marco Rubio, R-Fla., in a speech on poverty in January, focused on the idea of encouraging people to work, a longtime Republican priority. Rubio is working on legislation to alter the EITC program, but the outline he gave in his speech suggests he would leave its basic structure largely in place.

“We know that by promoting work over dependence, this reform would increase work-force participation in struggling communities and, in turn, would have numerous social, economic and cultural benefits to areas hardest-hit by the Great Recession,” Rubio said.

The remarks drew a relatively warm response from Democrats, a sharp contrast with the usual partisan barbs launched between the parties.

President Barack Obama in his fiscal 2015 budget plan released this week, sought to build on that consensus by calling for a dramatic expansion of the EITC to make it more widely available to childless single people, a step that could bring more men into a program that until now has mostly been targeted at women with children.

“This is a concept that has bipartisan support,” Gene Sperling, a top economic policy adviser to the president, said in a briefing with reporters this week. “And for those who are serious about not just talking the talk, but walking the walk on reducing poverty and helping low-income working families, they should support this.”

Economists have generally found the EITC successful in getting people into the workforce and keeping them out of poverty. That’s not unexpected.

But the studies also found, perhaps surprisingly, that people keep working even as they lose their tax credit when their incomes increase.

“There is overwhelming evidence the EITC encourages work among single mothers but little evidence that eligible-working women adjust their hours of work in response to the EITC,” economists Nada Eissa and Hilary Hoynes wrote in a 2005 paper, a trend they called “a consistent and somewhat puzzling finding.”

By contrast, the authors found married women with children, who often represent the second earner in their household, do adjust their work schedules to take advantage of the tax credit.

Eissa and Hoynes speculate that single mothers may not respond to the loss of their tax credit because they have relatively little say in how many hours they work.

Most jobs are either part-time or full-time, which makes it hard for employees to shave off just a few hours to claim bigger tax benefits. And because EITC recipients get their tax credit in one lump sum a year, they probably are not familiar with how small changes in their work life could affect their tax rates.

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