Women in the phase-out of the EITC are more than 5 percent less likely to work, and if they are already working, work as much as 20 percent fewer hours per year.
After a decade in near total obscurity, the Earned Income Tax Credit (EITC) was expanded in the tax acts of 1986, 1990, and 1993 to become the largest cash-transfer program for lower-income families with children. Introduced in 1975 as a modest program to offset the Social Security payroll tax, the EITC is expected to benefit 19 million taxpayers and cost the federal government 25 billion dollars (including tax expenditures and outlays) in 1998. Just one decade earlier, in 1986, only seven million families received two billion dollars in federal income tax refunds through the EITC.
In The Earned Income Tax Credit and the Labor Supply of Married Couples (NBER Working Paper No. 6856) , NBER Faculty Research Fellows Nada Eissa and Hilary Hoynes examine the effect of expansions of the EITC program between 1984 and 1996 on married couples with children. They find that the EITC increased married men's employment only slightly (0.2 percentage points), but reduced married women's employment by more than a full percentage point (out of a base of about 50 percent). Overall, family labor supply and pretax family earnings fell among married couples eligible for the EITC. Eissa and Hoynes conclude that the EITC effectively subsidizes married mothers to stay at home.
The EITC is a refundable tax credit, so that any amount of the credit exceeding the family's tax liability is returned either as a lump sum payment or as part of the worker's regular paycheck. Virtually all recipients, however, choose the lump sum payment. In 1997, the maximum credit amount was $3,656 for a family with two or more children, and $2,210 for a family with one child. Advocates of the EITC argue that, unlike traditional welfare, the credit helps "promote both the values of family and work." Indeed, the evidence suggests that the EITC promotes employment among eligible unmarried women with children.
However, to target benefits to lower-income families, the EITC is based on family income, which leads to a very different set of incentives for married taxpayers. In fact, the EITC sets up the same type of disincentives to work for EITC-eligible married women as traditional welfare does. In cases where the husband's earnings place the family at the beginning of the phase-out portion of the EITC ($11,650 in 1997), the family's credit is reduced by 21cents if the couple has two children (or 18 cents if one child). Combined with federal, state, and Social Security payroll taxes, the EITC substantially lowers the likelihood of work and the number of hours worked by secondary earners.
Eissa and Hoynes find that the modest overall labor supply distortions mask substantial differences among married EITC-eligible families. The expansion of the EITC has led to higher employment rates and hours worked by women in the phase-in region (of family income), and lower employment rates and hours worked beyond the phase-in. Women in the phase-out of the EITC are more than 5 percent less likely to work, and if they are already working, work as much as 20 percent fewer hours per year.
Eissa and Hoynes use data from the Current Population Survey for 1984 through 1996 and base their estimates on a subset of married couples with less than 12 years of schooling, who are disproportionately more likely to be eligible for the EITC than more educated couples. They examine labor force participation and hours worked, taking into account changes in the family budget constraint induced by tax policy, wages, income, and family size.
-- Lester A. Picker