Effective Policy for Reducing Poverty and Inequality? The Earned Income Tax Credit and the Distribution of Income
Forthcoming, Journal of Human Resources. (Joint with Ankur Patel)
We examine the effect of the EITC on the poverty and income of single mothers with children using a quasi-experiment approach that leverages variation in generosity due to policy expansions across tax years and family sizes. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. Specifically, a policy-induced $1000 increase in the EITC leads to an 8.4 percentage point reduction in the share of families with after tax and transfer income below 100% poverty. These results are robust to a rich set of controls and whether we compare single women with and without children or compare women with one child versus women with two or more children. They are also robust to whether we limit our analysis to the sharp increase in the 1993 expansion or use the full period of policy expansion, back to the 1986 Tax Reform Act. Importantly, event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We use these results to show that by capturing the indirect effects of the credit on earnings, static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure) may be underestimated by almost 50 percent. Ours is the first paper to simultaneously estimate the combined direct and indirect effects of the EITC, to quantify how much we miss by ignoring the behavior effect, and to estimate the effects across the income distribution.
Final Draft. (1MB)