Diana Tania Fiorillo1 THE US EARNED INCOME TAX CREDIT, ITS EFFECTS, AND POSSIBLE REFORMS Bruce D....

Diana Tania Fiorillo 1

THE US EARNED INCOME TAX CREDIT, ITS EFFECTS, AND POSSIBLE REFORMS

Bruce D. Meyer


MAIN TOPICSMAIN TOPICS

How the US EITC works How the US EITC works Features of recipientsFeatures of recipients The effects of EITC on povertyThe effects of EITC on poverty

income distribution income distribution labour supplylabour supply

Negative effects on hours of workNegative effects on hours of work marriagemarriage compliancecompliance Some possible solutionsSome possible solutions


THE EITCTHE EITC

ANTI-POVERTY PROGRAMME SINCE 1975

THAT TRANSFERS INCOME WHILE ENCOURAGES TO WORK

Subside only to few families:

where at least one component workswith a low incomewith at least a resident child (or childless)


Schedule for single parents with children:Schedule for single parents with children:

for those with one child there are somewhat for those with one child there are somewhat lower earnings subsidies, credits and implicit lower earnings subsidies, credits and implicit taxes.taxes.


THE RECEIVERSTHE RECEIVERS

LOW INCOME RATELOW INCOME RATEDEPENDENCE ON DEPENDENCE ON

CHILDRENCHILDREN

Target of eligible Target of eligible candidates are candidates are

SINGLE SINGLE MOTHERSMOTHERS

SOME DATA:

40% USD SINGLE MOTHERS

9% USD SINGLE FATHERS

46% USD MARRIED COUPLES WITH CHILDREN

6% USD CHILDLESS INDIVIDUALS

49% SINGLE PARENTS OLDER AND LESS EDUCATED THAN

THE NON-RECIPIENTS


TAX CREDIT ON TAX CREDIT ON INCOME DISTRIBUTIONINCOME DISTRIBUTION

The subsides go primarily to very low The subsides go primarily to very low income parentsincome parents

Investments on children are Investments on children are productive, so it is well targetedproductive, so it is well targeted

In 2004 EITC lifted 3.7 milion people In 2004 EITC lifted 3.7 milion people above the poverty lineabove the poverty line


BUT:BUT:

The effects are concentrated around The effects are concentrated around the poverty linethe poverty line

There are other policies like TANF There are other policies like TANF (Temporary Assistance for Needy (Temporary Assistance for Needy Families) and Food Stamps, that are Families) and Food Stamps, that are more targeted at very lowest more targeted at very lowest incomes, but have smaller effects at incomes, but have smaller effects at all income cutoffs, due to the welfare all income cutoffs, due to the welfare reformreform


EITC AND WORKEITC AND WORK

EITC makes work more attractive to single EITC makes work more attractive to single parents, at any hour levelparents, at any hour level

1990-1997 largest EITC expansion: as a 1990-1997 largest EITC expansion: as a consequence an increase of 7 percentage consequence an increase of 7 percentage points in employment of single mothers was points in employment of single mothers was registered. This registered. This increase in incentives was increase in incentives was especially high for lowest-skilled mothers, especially high for lowest-skilled mothers, those likely to receive welfare benefits and those likely to receive welfare benefits and who, if they work, were likely to be on the who, if they work, were likely to be on the phase-in or plateau portions of the EITC phase-in or plateau portions of the EITC schedule. schedule.


Since 1994 the employment rate of Since 1994 the employment rate of mothers with two or more children raisedmothers with two or more children raised

BUT:BUT:Since 1999 those rates have declined due to Since 1999 those rates have declined due to

unknown reasons, causing negative and unknown reasons, causing negative and unexpected effects on hours of work:unexpected effects on hours of work:

thus people are encouraged to reduce their thus people are encouraged to reduce their hours because of the EITChours because of the EITC


4 EXPLANATIONS4 EXPLANATIONS

Inability to vary the hours freely, because Inability to vary the hours freely, because of the preferences for certain hoursof the preferences for certain hours

Measurement errors in hoursMeasurement errors in hours Imperfect perception of marginal tax rateImperfect perception of marginal tax rate Complexity of eligibility and instructionsComplexity of eligibility and instructions

Among the couples, the effects are even Among the couples, the effects are even more complicated ( phase out )more complicated ( phase out )


EITC, CASELOADS AND MARRIAGEEITC, CASELOADS AND MARRIAGE

EITC has reduced the welfare receipts by EITC has reduced the welfare receipts by making work more attractive than welfare making work more attractive than welfare for a substantial fraction of single mothers for a substantial fraction of single mothers

It consequently made the number of welfare It consequently made the number of welfare caseloads drop and discouraged marriages caseloads drop and discouraged marriages for those childless or with an uneligible for those childless or with an uneligible childchild

people increase their tax credit by people increase their tax credit by divorcing or staying unmarried divorcing or staying unmarried


EITC AND EITC AND NONCOMPLIANCENONCOMPLIANCE

People don’t pay taxes intentionally or People don’t pay taxes intentionally or unintentionallyunintentionally

In 1999 30% of credits were claimed in In 1999 30% of credits were claimed in error driven by needless complexity error driven by needless complexity due to unclear instructions due to unclear instructions


REFORMSREFORMS

Common types include:Common types include:

more generous EITC for 3-child more generous EITC for 3-child familiesfamilies

reduction of marriage penaltiesreduction of marriage penalties simplified criteria for eligibilitysimplified criteria for eligibility increase credit for single childless increase credit for single childless

individualsindividuals


THANKS FOR THANKS FOR YOUR YOUR

ATTENTION!ATTENTION!

Diana Tania Fiorillo1 THE US EARNED INCOME TAX CREDIT, ITS EFFECTS, AND POSSIBLE REFORMS Bruce D....

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