EITC Benefits to Recent Mothers
Introduction
The Earned Income Tax Credit (EITC) is a refundable tax credit provided to low- and moderate-income workers in the United States. The EITC was first created in 1975 and has undergone a number of expansions in the decades since. The Omnibus Budget Reconciliation Act of 1993 provided a significant expansion of the EITC, increasing the post-tax earnings of low-income families by up to 16%. Kuka and Shenhav (2024) construct an MVPF for this EITC expansion. In particular, they estimate the welfare consequences of expanding the EITC for young, first-time single mothers.
In order to estimate the causal effect of the EITC expansion, Kuka and Shenhav (2024) employ a difference-in-difference (DD) strategy that compares the employment of early-exposed and late-exposed mothers. They define ‘early-exposed’ mothers as those with a first birth between 1993 and 1996 and ‘late-exposed’ mothers as those with a first birth between 1988 and 1991. As the result of the 1993 expansion, early-exposed mothers received higher EITC credits during the first five years after childbirth.
The paper measures the impact of the EITC using data on individual earnings from the Social Security Administration (SSA) that is merged to the Current Population Survey (CPS). They find that early-exposed mothers are approximately 5 percentage points more likely to be employed five years after the birth of their first child. Those employment effects dissipate over time such that there is no clear impact of the EITC on employment or hours worked 10 years after birth. That said, the early-exposed mothers have about 6 percent higher wages by their tenth year after childbirth. Those higher wages suggest that those early-exposed mothers are generating returns from their more extensive employment experience.
MVPF = 1.3
Net Cost
The authors estimate that early-exposed mothers received between $2,329 more total EITC benefits over 20 years after the 1993 expansion.
In order to calculate the net cost of the policy, the Kuka and Shenhav (2024) also consider how changes in labor force participation due to the EITC impacted government tax revenue. Using NBER TAXSIM rates, the authors estimate that the increased labor force participation of early-exposed mothers increased long-run tax liabilities by roughly $1,559. This implies a net cost to the government of $2,329 – $1,559 = $770.
Willingness to Pay
In order to calculate the willingness to pay for first-time single mothers, the authors split total EITC benefits into two amounts: the mechanical benefits received due to the reform and the behavioral benefits received due to labor supply responses. This is necessary because mechanical benefits are pure transfers and represent a lower bound on WTP, whereas behavioral benefits are due to individual optimization of labor supply and do not have a first-order impact on willingness to pay. The authors use a Oaxaca-Blinder decomposition to estimate that roughly $1,000 of the $2,329 direct cost of the EITC expansion reflected the mechanical change in EITC benefits.
MVPF Summary
The MVPF is then given by $1,000 / ($2,329-$1,559) = 1.3. This $1,000 represents the mechanical benefits of the policy. The $2,329 represents the direct cost of the policy and the $1,559 represents the impact of labor supply changes on tax revenue.
It is worth noting that the EITC is also provided to groups beyond mothers with young children. This paper does not consider the additional WTP and/or cost for other groups that were beneficiaries of the 1993 EITC expansion. Therefore, the MVPF constructed here should be thought of as the MVPF of the EITC policy focused on new mothers. More generally, these findings suggests that policies that promote careers of young mothers may have significant fiscal externalities that reduce the cost of such programs and increase their MVPFs.
Finally, the paper constructs the MVPF under a range of assumptions. The numbers herein focus on their most conservative specification which produces an MVPF of 1.3. Additional specifications, which take into account e.g. changes in transfers such as food stamps and disability, are outlined in Appendix Figure C.6 of the paper. These specifications yield higher MVPFs, including MVPFs above 25.
References
Kuka, Elira, and Na’ama Shenhav (2024). Long-Run Effects of Incentivizing Work After Childbirth. American Economic Review, 114(6): 1692-1722. DOI: https://doi.org/10.1257/aer.20220792
Policy Features
- Category
- Taxes
- Sub-Category
- Cash Transfers
- Beneficiary Type(s)
- Adults, Children and Youth, Children under five, Mothers and pregnant women, Parents
- Country of Implementation
- United States
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1257/aer.20220792