EITC Benefits to Recent Mothers

The authors estimate that early-exposed mothers received between $2,328 and $3,027 more total EITC benefits over 20 years after the 1993 expansion. The conservative specification corresponds to a cost estimate of $3,027.

In order to calculate the net cost of the policy, the Kuka and Shenhav (2020) 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 $1,441 to $1,559. Using the $1,441 figure implies a net cost to the government of $1,586.

The authors also note that increased labor force participation might further reduce government costs due to reduced usage of other transfer programs. They estimate that early-exposed mothers received $831 less in transfers from food stamps, disability and housing subsidies. The incorporation of this $831 in net costs produces the less conservative MVPF estimate of 5.6. (The authors also discuss the potential for the EITC to impact welfare receipt. They observe in the data that early-exposed mothers received $6,657 less in transfers when changes in welfare payments and medicaid are considered. That said, the authors against over-interpretation of these results. Welfare reform post-1993 may have impacted benefit receipt in ways that are unrelated to the employment incentive effects of the EITC.)

The conservative MVPF is then given by $2,000 / ($3,027 – $1,441) = 1.26. This $2,000 represents the mechanical benefits of the policy. The $3,027 represents the direct cost of the policy and the $1,441 represents the impact of labor supply changes on tax revenue. Including the $831 reduction in transfers increases the MVPF to from 1.26 to 5.6. The authors also provide an alternative MVPF using the lower bound on EITC costs and on mechanical benefits from the policy. This specification implies an MVPF of 1.3.

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

where ATR^0 is the average tax rate (participation rate) before the EITC reform and ATR^1 is the average tax rate after the reform. The estimate above is associated with \varepsilon =0.54 and \frac{ATR^1}{1-ATR^0} =0.38 for the same conservative MVPF of 1.26.

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.