EITC Expansions for Women in Urban Areas
Introduction
The Earned Income Tax Credit (EITC) is a refundable tax credit provided to low- and moderate-income workers in the United States. In 2017, the EITC had a budget of $73 billion and provided assistance to 28 million families. The EITC was first created in 1975 and has undergone a number of expansions in the decades since. Using plausibly exogenous variation in EITC eligibility over three decades, Bastian (2024) replicates the findings of Bastian and Jones (2021) by computing the MVPF of an expansion of the EITC to low-income mothers. This paper highlights differences in the MVPF of an EITC expansion from whether low-income mothers resided in rural or urban metropolitan statistical areas (MSAs).
Using data from the 1988–2017 Current Population Survey’s Annual Social and Economic Supplement (CPS ASEC), the paper studies the EITC’s effect on labor supply, taxes paid, and other government transfers received. The paper finds that EITC participation increases labor supply and taxes paid, and reduces government transfers received through other programs. The paper finds smaller effects of EITC participation among women in urban MSAs. For women in urban MSAs, the paper estimates that a $1,000 increase in the maximum possible EITC benefit led to on average a $255 increase in average EITC benefits. The paper notes that CPS data underestimate EITC benefits by 39%. Adjusting for this underestimate results in an estimated average increase in EITC benefits of $354.
The paper separately estimates the MVPF of a $1 increase in EITC benefits to women in rural MSAs, while Bastian and Jones (2021) report the overall MVPF of a $1 increase in EITC benefits to women.
MVPF = 1.8
Net Cost
The net costs are composed of direct costs and fiscal externalities. The direct cost of a $1 dollar expansion of the EITC is $1.
The fiscal externality in this setting has two components: (i) changes in tax revenue due to changes in labor supply and earnings, and (ii) changes in transfers from other government programs. For (i), the paper estimates that a $354 increase in EITC transfers leads to a $100 increase in net tax revenue. This is composed of changes in payroll, sales, and unemployment insurance (UI) taxes. As payroll and UI taxes are used to repay Social Security and UI claims, the paper follows Bastian and Jones (2021) and assumes that 51% of each dollar increase in taxes results in an increase of government revenue. Therefore, the total net increase in tax revenue is $100 x 0.51 = $51. This corresponds to a $0.14 increase in taxes collected for each $1 increase in transfers.
For (ii), the paper estimates that a $354 increase in EITC transfers is associated with a $162 reduction from other cash transfers (e.g., TANF/SNAP/AFDC). This corresponds to a $0.46 decrease in other government transfers for each $1 increase in EITC transfers.
As a result, the net cost per $1.00 increase in transfers is $1 – $0.14 – $0.46 = $0.40.
Willingness to Pay
The paper draws on an estimate of willingness to pay from Bastian and Jones (2021), which considers two groups of beneficiaries when computing the willingness to pay for a marginal increase in EITC transfers: (i) those who are already working and simply face an increase in income, and (ii) those who were out of the labor force and are induced to work due to the EITC expansion.
The paper argues that, by the envelope theorem, the members of group (ii) have a willingness of pay of zero. This is because, at the margin, they are indifferent between not working and working and receiving the increased EITC transfer.
Members of group (i) value an additional $1 of EITC transfers at a dollar-for-dollar rate. Therefore a $1 increase in EITC will generate a total willingness to pay equal to the fraction of beneficiaries in group (i). The paper relies on a simulated instrument to estimate the fraction of EITC recipients who enter the labor force. The paper finds that 72% of EITC benefits are mechanical, while the remaining 28% of benefits follow from the labor supply response. This means that 72% of benefits should be valued at a dollar-for-dollar rate. This approach yields a willingness-to-pay estimate of $0.72 cents for a $1.00 increase in EITC transfers.
MVPF Summary
The MVPF of a $1 increase in EITC benefits to women in urban MSAs is $0.72/$0.40 = 1.8.
References
Bastian, Jacob E. (2024). “The EITC in Rural and Economically Distressed Areas: More Bang Per Buck?” International Tax and Public Finance, 31: 136–159. DOI: https://doi.org/10.1007/s10797-023-09798-6
Bastian, Jacob E. and Maggie R. Jones (2021). “Do EITC Expansions Pay for Themselves? Effects on Tax Revenue and Government Transfers.” Journal of Public Economics, 196(104355). DOI: https://doi.org/10.1016/j.jpubeco.2020.104355
Policy Features
- Category
- Taxes
- Sub-Category
- Cash Transfers
- Beneficiary Type(s)
- Adults, Mothers and pregnant women
- Average Age
- 41
- Average Income
- 26000
- Country of Implementation
- United States
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1007/s10797-023-09798-6