1993 Expansion of the Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) provides a credit to low-income tax filers. At low levels of income, the credit is increasing in income so that it provides an incentive to work. The Omnibus Budget Reconciliation Act of 1993 provided a significant expansion of the EITC to low-income households with children. Hendren and Sprung-Keyser (2020) estimate the MVPF of the 1993 EITC expansion using estimates of the labor supply responses to the program from Hoynes and Patel (2018) for single women and Eissa and Hoynes (2004) for married women.

MVPF SUMMARY

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Hoynes and Patel (2018) find that a $1,000 increase in actual EITC take-up leads to an increase in the fraction that are above the poverty line by 8.4% (Table 1, Column 2) for those with one or more children and 5.4% for those with two or more children. Hendren and Sprung-Keyser (2020) translate this into an implied fiscal externality from the behavioral response to the EITC expansion using estimates of the tax and transfer schedule from Meyer and Rosenbaum (2001). They show this suggests every $1,000 of mechanical EITC benefits to single women costs the government $759 because of savings of transfer payments to those who would otherwise have received government transfers when not working. The estimates suggest that incentivizing single women into the labor force saves the government money and reduces the effective cost of the EITC expansion.

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 MVPF = \frac{1}{1-\varepsilon \frac{ATR^1}{1-ATR^0}}. The estimates above imply \varepsilon=0.94, \frac{ATR^1}{1-ATR^0}=0.25 and MVPF = 1.31 for unmarried women alone.

In contrast, for married women, the average transfer to those out of the labor force is smaller so that the impact of $1 of EITC expansions costs $1.042 to the government because the women induced into the labor market end up receiving the EITC transfer. Using the estimate that 52.3% of EITC beneficiaries that are married from Liebman (2002) and combining the effects for married and single women suggests a cost per dollar of mechanical expansion of the EITC of (0.523 * 1.042) + ((1-0.523)*0.759) = 0.89, so that the MVPF is $1/$0.89 = 1.12. Hendren and Sprung-Keyser (2020) estimate a confidence interval of [0.821, 1.212].

Hendren and Sprung-Keyser (2020) discuss the implications of potential spillovers onto children from the EITC expansions. Although there is no direct estimate of these impacts for the 1993 reform, there is suggestive evidence from the literature pooling EITC reforms that there may be positive effects on children. Positive effects on children would increase the WTP and reduce the net cost to the government, and therefore increase the MVPF above the 1.12 reported above.