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Do EITC expansions pay for themselves? Effects on tax revenue and government transfers

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  • Bastian, Jacob E.
  • Jones, Maggie R.

Abstract

This paper calculates the EITC’s net cost by estimating effects, both direct and through recipients’ behavioral changes, on tax revenue and government transfer spending. We show that the EITC increases labor supply and income, thereby increasing the taxes households pay and reducing the government transfer payments they receive. Using linked IRS–CPS data and several EITC policy changes, and focusing on married and unmarried women, we find that the EITC’s net cost is only 17 percent of the ($70 billion) budgetary cost over a one-year period. Although the EITC is one of the U.S.’s largest and most important public assistance programs, the EITC is actually one of the U.S.’s least expensive anti-poverty programs.

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  • Bastian, Jacob E. & Jones, Maggie R., 2021. "Do EITC expansions pay for themselves? Effects on tax revenue and government transfers," Journal of Public Economics, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:pubeco:v:196:y:2021:i:c:s004727272030219x
    DOI: 10.1016/j.jpubeco.2020.104355
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    2. Otto Lenhart, 2023. "The earned income tax credit and food insecurity," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(5), pages 1543-1570, October.
    3. Otto Lenhart, 2021. "Earned income tax credit and crime," Contemporary Economic Policy, Western Economic Association International, vol. 39(3), pages 589-607, July.
    4. Diane Whitmore Schanzenbach & Michael R. Strain, 2021. "Employment Effects of the Earned Income Tax Credit: Taking the Long View," Tax Policy and the Economy, University of Chicago Press, vol. 35(1), pages 87-129.
    5. Hicks, Jeffrey & Simard-Duplain, Gaëlle & Green, David A. & Warburton, William, 2022. "The effect of reducing welfare access on employment, health, and children's long-run outcomes," CLEF Working Paper Series 51, Canadian Labour Economics Forum (CLEF), University of Waterloo.
    6. Bastian, Jacob E. & Black, Dan A., 2024. "Relaxing financial constraints with tax credits and migrating out of rural and distressed America," Journal of Public Economics, Elsevier, vol. 234(C).
    7. Jacob Bastian & Lance Lochner, 2022. "The Earned Income Tax Credit and Maternal Time Use: More Time Working and Less Time with Kids?," Journal of Labor Economics, University of Chicago Press, vol. 40(3), pages 573-611.
    8. Jessica Pac & Lawrence M. Berger, 2024. "Quasi‐experimental evidence on the employment effects of the 2021 fully refundable monthly child tax credit," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 43(1), pages 192-213, January.
    9. Felix J. Bierbrauer & Pierre C. Boyer & Emanuel Hansen, 2023. "Pareto‐Improving Tax Reforms and the Earned Income Tax Credit," Econometrica, Econometric Society, vol. 91(3), pages 1077-1103, May.
    10. Yuval Mazar & Yaniv Reingewertz, 2023. "The effect of child allowances on female labour supply: evidence from Israel," Economica, London School of Economics and Political Science, vol. 90(359), pages 882-910, July.
    11. Jacob Bastian & Lance Lochner, 2020. "The EITC and Maternal Time Use: More Time Working and Less Time with Kids?," NBER Working Papers 27717, National Bureau of Economic Research, Inc.
    12. Redonda, Agustin & de Sarralde, Santiago Diaz & Hallerberg, Mark & Johnson, Lise & Melamud, Ariel & Rozemberg, Ricardo & Schwab, Jakob & von Haldenwang, Christian, 2019. "Tax expenditure and the treatment of tax incentives for investment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-11.
    13. Justin Gallagher & Daniel Hartley & Shawn M. Rohlin, 2019. "Weathering an Unexpected Financial Shock: The Role of Cash Grants on Household Finance and Business Survival," Working Paper Series WP-2019-10, Federal Reserve Bank of Chicago.
    14. Gustafsson, Johan, 2024. "Favorable tax treatment of older workers in general equilibrium," Umeå Economic Studies 1023, Umeå University, Department of Economics.
    15. Nicardo S. McInnis & Katherine Michelmore & Natasha Pilkauskas, 2023. "The Intergenerational Transmission of Poverty and Public Assistance: Evidence from the Earned Income Tax Credit," NBER Working Papers 31429, National Bureau of Economic Research, Inc.
    16. Watson, C. Luke, 2021. "the General Equilibrium Incidence of the Earned Income Tax Credit," SocArXiv 8n3ag, Center for Open Science.
    17. Enrico Rubolino, 2022. "Taxing the Gender Gap: Labor Market Effects of a Payroll Tax Cut for Women in Italy," Cahiers de Recherches Economiques du Département d'économie 22.01, Université de Lausanne, Faculté des HEC, Département d’économie.
    18. Montpetit, Sébastien & Beaureard, Pierre-Loup & Carrer, Luisa, 2024. "A welfare analysis of universal childcare: Lessons from a Canadian reform," CLEF Working Paper Series 73, Canadian Labour Economics Forum (CLEF), University of Waterloo.
    19. Emanuel Hansen, 2020. "Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal?," CESifo Working Paper Series 8630, CESifo.

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    More about this item

    Keywords

    Earned income tax credit; Taxes; Public assistance; Government transfers; Women’s labor supply; Fiscal policy;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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