1986 Expansion of the Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) provides a tax credit to low-income tax filers with children. At low levels of income, the credit is increasing in one’s income so that it provides an incentive to work. In 1986, the EITC was significantly expanded. Eissa and Leibman (1996) study the impact of this expansion on labor supply of unmarried women with children.

MVPF SUMMARY

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Eissa and Leibman (1996) find an increase in labor force participation of unmarried women with children of 2.8 percentage points. Hendren and Sprung-Keyser (2020) translate these estimates into their implied MVPF. They use estimates of the income tax schedule from Meyer and Rosenbaum (2001) to calculate the implied impact of this labor force response on government revenues. They estimate that single women receive greater government transfers if they are out of the labor force versus working, so that inducing them to work saves the government $0.37 for every $1 of EITC subsidy.

These estimates can also be expressed in terms of the labor force participation elasticity (\varepsilon) and the change in the average tax wedge \left(\frac{ATR^1}{1-ATR^0}\right). This is useful to compare MVPFs across EITC reforms, given that the EITC MVPF is given by \left(\frac{1}{1 – \varepsilon \frac{ATR^1}{1-ATR^0}}\right). The estimates above imply (\varepsilon)=0.99, \left(\frac{ATR^1}{1-ATR^0}\right)=0.37 and MVPF = 1.59 for unmarried women alone.

Roughly half of EITC beneficiaries are married (Liebman, 2002). For married beneficiaries, Hendren and Sprung-Keyser (2020) use estimates from Eissa and Hoynes (2004) who estimate the impact of the EITC expansion on married households. Combining across households, Hendren and Sprung-Keyser (2020) show that these estimates imply that every $1 of benefits cost on average $1.025. This difference relative to single women arises because married women receive fewer government transfers if they are not in the labor force.

Combining, the estimates suggest that $1 of mechanical EITC expansion costs the government $0.836, which implies an MVPF of 1.2, with a confidence interval of [1.04,1.38].