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Do In-Work Tax Credits Serve as a Safety Net?

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  • Marianne Bitler
  • Hilary Hoynes
  • Elira Kuka

Abstract

The cash and near cash safety net in the U.S. has undergone a dramatic transformation in the past fifteen years. Federal welfare reform has led to the “elimination of welfare as we know it” and several tax reforms have substantially increased the role of “in-work”' assistance. In 2010, we spent more than 5 dollars on the Earned Income Tax Credit (EITC) for every dollar spent on cash benefits through Temporary Assistance for Needy Families (TANF), whereas in 1994 on the eve of federal welfare reform these programs were about equal in size. In this paper, we evaluate and test whether the EITC satisfies a defining feature of a safety net program—that it responds to economic need. In particular, we explore how EITC participation and expenditures change with the business cycle. The fact that the EITC requires earned income leads to a theoretical ambiguity in the cyclical responsiveness of the credit. We use administrative IRS data to examine the relationship between business cycles and the EITC program. Our empirical strategy relies on exploiting differences in the timing and severity of economic cycles across states. The results show that higher unemployment rates lead to higher EITC recipients and total dollar amounts of credits for married couples. On the other hand, the effect of business cycles on the EITC is insignificant for single individuals, whether measured by recipients or expenditures. In sum, our results show that the EITC serves as an automatic stabilizer for married couples with children but not for the majority of recipients—single parents with children. The patterns we identify are consistent with the predictions of static labor supply theory, and with expectations about how economic shocks are likely to affect one versus two-earner households.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19785.

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Date of creation: Jan 2014
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Handle: RePEc:nbr:nberwo:19785

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References

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  1. Jeffrey Grogger, 2003. "The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Headed Families," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 394-408, May.
  2. James P. Ziliak & David N. Figlio & Elizabeth E. Davis & Laura S. Connolly, 2000. "Accounting for the Decline in AFDC Caseloads: Welfare Reform or the Economy?," Journal of Human Resources, University of Wisconsin Press, vol. 35(3), pages 570-586.
  3. Bruce D. Meyer & James X. Sullivan, 2011. "Consumption and Income Poverty over the Business Cycle," NBER Working Papers 16751, National Bureau of Economic Research, Inc.
  4. William N. Evans & Craig L. Garthwaite, 2010. "Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health," NBER Working Papers 16296, National Bureau of Economic Research, Inc.
  5. Rajeev Dehejia & Adriana Lleras-Muney, 2004. "Booms, Busts, and Babies’ Health," Working Papers 250, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
  6. Hilary W. Hoynes & Douglas L. Miller & David Simon, 2012. "Income, the Earned Income Tax Credit, and Infant Health," NBER Working Papers 18206, National Bureau of Economic Research, Inc.
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Cited by:
  1. Marianne Bitler & Hilary Hoynes, 2013. "The More Things Change, the More They Stay the Same: The Safety Net, Living Arrangements, and Poverty in the Great Recession," NBER Working Papers 19449, National Bureau of Economic Research, Inc.

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