The Earned Income Tax Credit: Antipoverty Effectiveness and Labor Market Effects

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On the other hand, policy-driven maternal labor supply change, especially inducing single mothers to join the labor force, could potentially reduce maternal time input in children, which could impair child development. The availability of non-parental care which mother could purchase in the market further complicates the case since the productivity of goods, maternal time, non-parental child care remains empirically unclear, e. Some studies have found that effects are concentrated among younger children Dahl and Lochner , Maxfield , Michelmore , but others have found the opposite Chetty et al.


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The resolution has important implications for theories of child development. In order to better to these questions, we need a model which i incorporate different channels explicitly, which allows us to quantify each effect, and ii captures children's dynamic skill formation. This paper draws on international empirical evidence to explore these two issues. An increase in the minimum wage would boost the wages of So, for people who are concerned about the working poor, this minimum wage increase is not a very effective mechanism for reducing poverty. Artificially increasing the wages of low-skilled workers above the wage rate established in the competitive marketplace by the forces of supply and demand would reduce the number of workers employed at this higher wage.

The CBO reported the likely range for this elasticity to be from slightly negative to —0. In addition to these microeconomic demand effects, the CBO analysis includes macroeconomic effects that take into account the aggregate demand increases that occur because of the more general distributional effects of minimum wage increases.

The Earned Income Tax Credit - Equitable Growth

The CBO argued that aggregate demand would increase because the families of the workers receiving the higher wages have a greater propensity to consume than do the owners of the firms who pay them and the families who purchase the products whose prices have risen because of the higher minimum wage. The macroeconomic effects to some degree reduce the negative microeconomic effects on employment that the CBO predicts [1]. Krueger, which shattered this decades-old consensus using innovative natural experimental designs [3]. It found no evidence of a negative effect on employment—but some evidence of a positive effect.

This surprising result of positive employment effects has not proven to be robust, however. A review of the literature using these innovative natural experimental designs, focusing mostly on research using variations in minimum wage increases across states, concludes that these increases have small but significant negative employment effects that are close to the previous consensus values [4].

The Potential of State Earned Income Tax Credits

One reason for the change in findings between and is that the federal minimum wage remained relatively low after As more states increased their minimum wage above the federal minimum, the greater variation in the data made it possible to more accurately identify the effects of the minimum wage policy.

The intense debate on the appropriate identification strategy continues, especially on how to define relevant control groups along the borders of states with different levels of the minimum wage. The most recent evidence highlights the sensitivity of results to the definition of treatment and control groups and also shows that findings are sensitive to the number of leads and lags past and future levels of the minimum wage in the empirical model.

When the model uses matched pairs of nearby, rather than contiguous, counties across state borders that are plausibly better controls, negative employment effects from minimum wage increases reemerge [5]. Though the majority of evidence is US-based, minimum wages have also been widely introduced in other countries. Minimum wages have been effectively introduced either as a statutory minimum or through collective bargaining in almost all European countries, most recently in Germany, and are higher relative to the average wage than in the US. Still, empirical evidence on the economic effects in Europe is scarce, in large part because of a lack of plausible geographical controls.

A comprehensive evaluation of the economic impacts of different minimum wage regimes in Europe using a variety of empirical strategies shows heterogeneous impacts across age groups and countries, though there has been almost no evidence for adverse employment effects [6]. Focusing on the national minimum wage introduced in the UK in , a study finds zero to marginally positive employment effects of the minimum wage based on differences in regional wage rates before its introduction [7]. To create a quasi-experimental setting to identify these effects, the study exploits the fact that the higher the regional wage rate, the weaker the bite of the minimum wage.

For France, a study found substantial negative employment effects in the s. However, a more recent study from could not identify any significant effect of the minimum wage regime on employment [8]. This more positive result could be driven by the fact that French firms can collect substantial subsidies, which can defray the cost of employer contributions for minimum wage workers.

In contrast to the effects on employment, the evidence that minimum wage increases are not very effective in reducing poverty is much less contentious. Minimum wage increases are not related to decreases in poverty rates because most people living in poverty do not work, and many of the working poor do not work full-time; or they work at hourly wage rates above the new minimum [3] , [4].

In fact, after a rise in the US minimum wage, the movement out of poverty of families whose wage earnings increase is more than offset by the movement of low-income families onto the poverty rolls because their earnings fall [4].

Earned Income Credit (EIC) 2018 Total

Another analysis, using methods similar to those of [3] but with more recent data, also finds no relationship between minimum wage increases and poverty rates even for the working poor [4]. However, a further study found that under certain conditions—when labor demand is growing during the expansion phase of the business cycle and minimum-wage-induced employment effects are small—minimum wage increases can reduce poverty [9].

For evidence outside the US, a UK study finds an easing effect of the minimum wage on wage inequality, especially at the lower ends of the distribution [7]. However, ex ante simulations predict that the minimum wage will be an ineffective instrument for poverty reduction, because much of its cost will be offset by reductions in existing means-tested income support and high marginal tax rates [10].

On this issue there is very little disagreement. A much less reported finding of the CBO report is that the earned income tax credit is a far superior way to provide additional income to workers who live in poor families [1]. In the report, the CBO refers to its report, which compared the cost to employers of a change in the minimum wage that raised the income of poor families by a given amount with the cost to the federal government of an enhancement in the earned income tax credit that raised the income of poor families by roughly the same amount.

The cost of a higher minimum wage to employers and to consumers who purchase their products was much larger than the cost to the government and the taxpayers who provide these revenues of an enhancement in the earned income tax credit. What is not directly mentioned in the CBO report, but what a careful reader of Table 1 in that report can see the key values from that table are reproduced here in Figure 1 , is how much better an earned income tax credit enhancement rather than an increase in the minimum wage would be for raising the wage earnings of the working poor [1].

Projections and evaluations for European countries find similar results [6] , [7]. The reason for this outcome is that most minimum wage workers who gain from an increase in the minimum wage are not in poor or even in near-poor families. And some workers who do live in poor families have wage rates that are already above the proposed minimum.

They just do not work full time. But it is also the case that some of the working poor will lose their jobs or work fewer hours. The lives of the working poor could be dramatically improved if the real economic costs of the minimum wage were instead devoted to financing earned income tax credit expansion. The earned income tax credit is a much more targeted and effective policy for helping poor families because it raises only the earnings of workers in low- or moderate-income families, and the size of the effect depends on the number of dependent children in those families.

Thus, people living in lower-income families receive the vast majority of benefits. If the child was born or died in the year and the claimant's home was the child's home, or potential home, for the entire time the child was alive during the year, this counts as living with the claimant, and per instructions, 12 months is entered on Schedule EIC. Unlike the rules for claiming a dependent, there is no rule that a qualifying child not support herself or himself.

A child who supports himself or herself can still qualify as a qualifying child for purposes of the EIC. There is an exception for older married "children. A claimant must be either a United States citizen or resident alien. In the case of married filing jointly where one spouse is and one isn't, the couple can elect to treat the nonresident spouse as resident and have their entire worldwide income subject to U.

Policy Basics: The Earned Income Tax Credit

However, a person on extended military duty is considered to have met this requirement for the period of the duty served [ citation needed ]. Filers who are not claiming a qualifying child must be between the ages of 25 and 64 inclusive.

Key Findings

For a married couple without a qualifying child, only one spouse must be within this age range. For a single person with a qualifying child, there is no age requirement per se other than the requirement that the single person not himself or herself be claimable as another relative's qualifying child see Age section above. A married couple with at least one qualifying child is only occasionally classified as claimable by another relative, especially if the married couple has earned income and elects to claim EIC. All filers and all children being claimed must have a valid social security number.

A couple who is legally married can file MFJ even if they lived apart the entire year and even if they shared no revenues or expenses for the year, as long as both spouses agree. However, if both spouses do not agree, or if there are other circumstances such as domestic violence, a spouse who lived apart with children for the last six months of the year and who meets other requirements can file as Head of Household.

There is even an IRS form that can be used to request direct deposit into up to three separate accounts. In addition, if a person is "legally separated" according to state law by December 31, that will also carry. This is an edge case, but there are income ranges and situations in which an increase of investment dollars will result in a loss of after-tax dollars. Form is required after this time period in order to be reinstated.

Evaluation

However, this form is not required if EIC was reduced solely because of mathematical or clerical error. Cynthia and Jerry Grey have two children ages 6 and 8. Since they are into the phase-out range, their EIC will phase out by the greater of earned income or adjusted gross income. Since they are claiming children, the Greys will also need to attach Schedule EIC to their tax return which will ask for each child, the child's name, social security number, year of birth, relationship to couple, and months lived with couple in the United States during These EITC dollars had a significant impact on the lives and communities of the nation's lowest-paid working people largely repaying any payroll taxes they may have paid.

The stimulus effects of the EITC and other consumption-augmenting policies have been challenged by more recent and rigorous studies. Haskell finds that the unique spending patterns of lump-sum tax credit recipients and the increasingly global supply chain for consumer goods is counter-productive to producing high, localized multipliers. He places the local multiplier effect somewhere in the range of 1. The lower multiplier is due to recipients emphasizing "big-ticket" durable-good purchases, which are typically produced elsewhere, versus locally produced products and services such as agricultural products or restaurant visits.

However, Haskell points to a silver lining: there are perhaps more important benefits from recipients who use the credit for savings or investment in big-ticket purchases that promote social mobility, such as automobiles, school tuition, or health-care services. EITC follows a graphical benefit pattern of going up a hill, traveling along a plateau, and then going back down the hill more slowly than it went up. For example, a married couple with two qualifying children and yearly income of seven thousand dollars will [ when? A single person such as a single parent, aunt, uncle, grandparent, older sibling, etc.

But the single person has a shorter plateau. Thus it is always preferable to have an extra fifty dollars of actual earned income the table for EITC steps in increments of fifty dollars.


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