Research Roundup: The Many Benefits of the Earned Income Tax Credit

ESSPRI
ESSPRI
Mar 28, 2019 · 4 min read

States serious about fighting poverty would be hard-pressed to find a better tool.

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by Dan Paley | March 28, 2019

In California, the newly elected Governor Gavin Newsom has an ambitious plan to cut poverty by dramatically expanding the state’s Earned Income Tax Credit. Twenty-nine states have their own version of the EITC, in addition to the federal credit, and some are considering expanding it as well.

Below is a roundup of some of the work ESSPRI has done on the EITC highlighting just a few of its many long-run benefits and its efficacy in targeting poverty.

The long-run effects of the EITC on disadvantaged neighborhoods

How have the core anti-poverty policies in the U.S. affected long-term outcomes in terms of people’s earnings and their ability to escape poverty? That’s the question asked by ESSPRI director, David Neumark, in a set of studies that think beyond the short-term effects of anti-poverty policies. The first study finds that the EITC is strongly associated with longer-term reductions in poverty. The second study shows that single women with children who were exposed to the positive work incentives of the EITC in their 20s and 30s earn substantially more by age 40.

The EITC as an alternative to the minimum wage

Much of the recent debate around wages has focused on the minimum wage. Advocates argue that minimum wages raise earnings for low-income people, sometimes as if there are no costs. Opponents contend that raising the minimum wage will lead to massive job losses. But the real question is, how much does the minimum wage help poor and low-income families? On this front, the minimum wage is ineffective. But it isn’t the only policy in our arsenal. The Earned Income Tax Credit does a much better job of targeting the poor, and without the adverse effect of raising labor costs for businesses. In this lecture, David Neumark shows how the EITC is a far more effective tool than the minimum wage.

How the EITC affects children into adulthood

The EITC does far more than provide working families with some extra cash in April. According to ESSPRI affiliate Katherine Michelmore, exposure to the Earned Income Tax Credit during childhood improves educational attainment and labor market outcomes in adulthood. This study provides the long-term view policymakers should have when evaluating these policies. As Michelmore states, “The EITC not only works to lift families out of poverty for the current generation but also provides hope of upward mobility for future generations of children growing up in economically disadvantaged households.”

The EITC increases the financial stability of low-income single mothers

In another study by Michelmore, she and her colleague Lauren Jones found that the EITC increases the financial stability of low-income single mothers. Their results suggest that the EITC not only encourages work, but also allows families to save a portion of their earnings, increasing their longer-term financial well-being. “Financial well-being can help families weather economic shocks, invest in homes or education, or feel secure enough to search for better jobs. The EITC may therefore have additional, long-term benefits beyond poverty reduction.”

The EITC compliments other programs to contribute to long-term economic self-sufficiency

Government economic security programs such as food assistance, housing subsidies, and working-family tax credits help children do better in school, improve their health, and lead to economic self-sufficiency in adulthood. That’s the conclusion of an exhaustive research review of more than sixty studies assembled by ESSPRI affiliate, Arloc Sherman, and his colleague, Tazra Mitchell, at the Center on Budget and Policy Priorities. The EITC compliments other programs to “boost children’s school achievement, chances of attending college, and health outcomes.”

A more generous EITC boosts women’s earnings in the long run

Governments now considering an expansion of the credit do so based on extensive research that focuses only on its short-term benefits. But a more generous EITC also boosts women’s earnings in the long run, according to David Neumark. “Previous research has focused nearly exclusively on the short-term effects on employment, showing that a more generous EITC increases employment among women, especially low-skilled, single mothers, while also reducing poverty. But the evidence ignores a longer-run benefit of the EITC: the cumulative effects of working more also increase women’s earnings in the longer run.”

How to use the EITC to fight poverty by getting people to work

In a set of op-eds in the Wall Street Journal and the L.A. Daily News, David Neumark considers two ways Congress can encourage more work. One is increasing the minimum wage. The other is expanding the earned-income tax credit. Neumark’s research shows that “these two policies can have very different, and perhaps unintended, effects on the ability to become economically self-sufficient over time.”

The EITC, it should be noted, is also an appealing policy in our present political climate. According to Neumark, “A stronger emphasis on policies that increase economic self-sufficiency in the longer-run can, in our polarized political environment, offer common ground for fighting poverty. Reducing poverty through long-term effects of pro-work incentives can appeal to Democrats focused on redistribution and to Republicans who emphasize work as the solution to poverty.”

State EITC may increase participation in the Federal EITC

States considering an expansion to their EITC may do so to provide a more generous program than the federal program. They might be interested to know that state and local governments can also benefit from maximizing participation of their constituents in the federal EITC. Neumark has found that state EITCs increase federal EITC program participation, which means states may reap the benefit of the federal EITC on top of their own state EITC.

To learn more about ESSPRI, visit esspri.uci.edu

ESSPRI

A research institute at UC Irvine that studies policies and…

ESSPRI

Written by

ESSPRI

Studying policies and programs designed to support economic self-sufficiency.

ESSPRI

ESSPRI

A research institute at UC Irvine that studies policies and programs designed to support economic self-sufficiency. Learn more at esspri.uci.edu.

ESSPRI

Written by

ESSPRI

Studying policies and programs designed to support economic self-sufficiency.

ESSPRI

ESSPRI

A research institute at UC Irvine that studies policies and programs designed to support economic self-sufficiency. Learn more at esspri.uci.edu.

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