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

Author

Listed:
  • 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.

Suggested Citation

  • Marianne Bitler & Hilary Hoynes & Elira Kuka, 2014. "Do In-Work Tax Credits Serve as a Safety Net?," NBER Working Papers 19785, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19785
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    References listed on IDEAS

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    1. Rajeev Dehejia & Adriana Lleras-Muney, 2004. "Booms, Busts, and Babies' Health," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1091-1130.
    2. Gordon B. Dahl & Lance Lochner, 2012. "The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit," American Economic Review, American Economic Association, vol. 102(5), pages 1927-1956, August.
    3. 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.
    4. Hilary Hoynes & Doug Miller & David Simon, 2015. "Income, the Earned Income Tax Credit, and Infant Health," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 172-211, February.
    5. Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
    6. William N. Evans & Craig L. Garthwaite, 2014. "Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 258-290, May.
    7. Meyer, Bruce D. & Rosenbaum, Dan T., 2000. "Making Single Mothers Work: Recent Tax and Welfare Policy and Its Effects," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1027-1062, December.
    8. repec:pri:cheawb:adriana_booms is not listed on IDEAS
    9. 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.
    10. 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.
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    Citations

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    Cited by:

    1. Kory Kroft & Kucko Kavan & Etienne Lehmann & Johannes Schmieder, 2015. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," Working Papers hal-01292126, HAL.
    2. Bruce D. Meyer & Derek Wu, 2018. "The Poverty Reduction of Social Security and Means-Tested Transfers," NBER Working Papers 24567, National Bureau of Economic Research, Inc.
    3. repec:eee:socmed:v:194:y:2017:i:c:p:67-75 is not listed on IDEAS
    4. David Splinter & Jeff Larrimore & Jacob Mortenson, 2017. "Whose Child Is This? Shifting of Dependents Among EITC Claimants Within the Same Household," Finance and Economics Discussion Series 2017-089, Board of Governors of the Federal Reserve System (U.S.).
    5. Larrimore, Jeff & Mortenson, Jacob & Splinter, David, 2015. "Income and Earnings Mobility in U.S. Tax Data," Finance and Economics Discussion Series 2015-61, Board of Governors of the Federal Reserve System (U.S.).
    6. Lisa Gennetian & Sharon Wolf & Heather Hill & Pamela Morris, 2015. "Intrayear Household Income Dynamics and Adolescent School Behavior," Demography, Springer;Population Association of America (PAA), vol. 52(2), pages 455-483, April.
    7. repec:spr:demogr:v:55:y:2018:i:1:d:10.1007_s13524-017-0642-7 is not listed on IDEAS
    8. Marianne Bitler & Hilary Hoynes, 2016. "The More Things Change, the More They Stay the Same? The Safety Net and Poverty in the Great Recession," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 403-444.
    9. Hilary W. Hoynes & Diane Whitmore Schanzenbach, 2018. "Safety Net Investments in Children," NBER Working Papers 24594, National Bureau of Economic Research, Inc.
    10. Melanie Guldi & Lucie Schmidt, 2017. "Taxes, Transfers, and Women’s Labor Supply in the United States," Working Papers 2017-01, University of Central Florida, Department of Economics.
    11. Hilary Hoynes & Jesse Rothstein, 2016. "Tax Policy Toward Low-Income Families," NBER Working Papers 22080, National Bureau of Economic Research, Inc.
    12. David Neumark, 2016. "Policy levers to increase jobs and increase income from work after the Great Recession," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-38, December.
    13. repec:ntj:journl:v:70:y:2017:i:4:p:737-758 is not listed on IDEAS
    14. Markowitz, Sara & Komro, Kelli A. & Livingston, Melvin D. & Lenhart, Otto & Wagenaar, Alexander C., 2017. "Effects of state-level Earned Income Tax Credit laws in the U.S. on maternal health behaviors and infant health outcomes," Social Science & Medicine, Elsevier, vol. 194(C), pages 67-75.
    15. Korenman, Sanders D. & Remler, Dahlia K., 2016. "Including health insurance in poverty measurement: The impact of Massachusetts health reform on poverty," Journal of Health Economics, Elsevier, vol. 50(C), pages 27-35.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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