Exposure to the Earned Income Tax Credit during childhood improves educational attainment and labor market outcomes in adulthood.
by Katherine Michelmore | October 29, 2018
The Earned Income Tax Credit is one of the largest cash-transfer programs in the United States. In 2013, the EITC distributed over $66 billion to 28 million low-income families. It’s also one of the most effective anti-poverty programs, lifting 3 million children out of poverty each year. While a large body of research indicates that the EITC has had a substantial impact on low-income families — increasing labor force participation and earnings, lifting families out of poverty, improving health — and that these positive effects extend to children — reducing low birth weight, improving elementary school test scores and college going — little is known about the long-term effects of the EITC on children as they reach adulthood. Jacob Bastian and I, in new work published in the Journal of Labor Economics, analyze how exposure to the EITC in childhood affects subsequent educational attainment and labor market outcomes in adulthood. This long-term lens is important to policymakers who seek not only to alleviate poverty in the near-term but also to reduce the intergenerational transmission of poverty in the long-run.
The EITC has a positive impact on educational attainment and employment for individuals exposed to it during childhood. This is especially true with education outcomes for children when they are exposed to additional resources in their teenage years.
The effect of the EITC on educational attainment is larger for subgroups of academically at-risk youth. For high school graduation rates, the effect of EITC exposure between ages 13 and 18 are larger for black children (2.4 percentage points) and children in single-parent households (1.7 percentage points). Effects are largest among black boys (2.7 percentage points).
The primary channel through which the EITC improves these outcomes is increases in pretax family earnings from employment, rather than from the receipt of the benefit itself.
Implications for Policy
Policy-induced increases in EITC generosity during childhood have a positive effect on educational attainment and employment in adulthood. A $1000 increase in EITC exposure between ages 13 and 18 leads to a 1.3% increase in high school graduation, a 4.2% increase in college graduation, a 1.0% increase in employment as an adult, and a 2.2% increase in earnings as an adult.
The EITC has a substantial impact on pretax family earnings, implying that the EITC reduces poverty even before accounting for the income from receipt of the benefit. While a policy-induced $1,000 increase in the maximum EITC benefit available to families represents only about a $200 increase in the average EITC benefit per family, this same increase in the maximum EITC increases earnings from employment by $2,700. This implies that one of the primary channels through which the EITC affects educational and employment outcomes is through increases in family income generated by increases in maternal labor supply.
Given its generosity (the EITC benefit itself is worth up to 45% of a low-income family’s annual earnings), and its work-promoting incentives, the EITC has enjoyed widespread popularity among liberal and conservative policymakers alike. And for good reason — 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.