THE US EARNED INCOME TAX CREDIT, ITS EFFECTS, AND POSSIBLE REFORMS Bruce D. Meyer

1. THE US EARNED INCOME TAX CREDIT, ITS EFFECTS, AND POSSIBLE REFORMSBruce D. Meyer Diana Tania Fiorillo

2. MAIN TOPICS • How the US EITC works • Features of recipients • The effects of EITC on poverty income distribution labour supply • Negative effects on hours of work marriage compliance • Some possible solutions Diana Tania Fiorillo

3. THE EITC ANTI-POVERTY PROGRAMME SINCE 1975 THAT TRANSFERS INCOME WHILE ENCOURAGES TO WORK Subside only to few families: where at least one component works with a low income with at least a resident child (or childless) Diana Tania Fiorillo

4. Schedule for single parents with children: for those with one child there are somewhat lower earnings subsidies, credits and implicit taxes. Diana Tania Fiorillo

5. THE RECEIVERS LOW INCOME RATE DEPENDENCE ON CHILDREN Target of eligible candidates are SINGLE MOTHERS SOME DATA: 40% USD SINGLE MOTHERS 9% USD SINGLE FATHERS 46% USD MARRIED COUPLES WITH CHILDREN 6% USD CHILDLESS INDIVIDUALS OLDER AND LESS EDUCATED THAN THE NON-RECIPIENTS 49% SINGLE PARENTS Diana Tania Fiorillo

6. TAX CREDIT ON INCOME DISTRIBUTION • The subsides go primarily to very low income parents • Investments on children are productive, so it is well targeted • In 2004 EITC lifted 3.7 milion people above the poverty line Diana Tania Fiorillo

7. BUT: • The effects are concentrated around the poverty line • There are other policies like TANF (Temporary Assistance for Needy Families) and Food Stamps, that are more targeted at very lowest incomes, but have smaller effects at all income cutoffs, due to the welfare reform Diana Tania Fiorillo

8. EITC AND WORK • EITC makes work more attractive to single parents, at any hour level • 1990-1997 largest EITC expansion: as a consequence an increase of 7 percentage points in employment of single mothers was registered. This increase in incentives was especially high for lowest-skilled mothers, those likely to receive welfare benefits and who, if they work, were likely to be on the phase-in or plateau portions of the EITC schedule. Diana Tania Fiorillo

9. Since 1994 the employment rate of mothers with two or more children raised BUT: Since 1999 those rates have declined due to unknown reasons, causing negative and unexpected effects on hours of work: thus people are encouraged to reduce their hours because of the EITC Diana Tania Fiorillo

10. 4 EXPLANATIONS • Inability to vary the hours freely, because of the preferences for certain hours • Measurement errors in hours • Imperfect perception of marginal tax rate • Complexity of eligibility and instructions Among the couples, the effects are even more complicated ( phase out ) Diana Tania Fiorillo

11. EITC, CASELOADS AND MARRIAGE EITC has reduced the welfare receipts by making work more attractive than welfare for a substantial fraction of single mothers It consequently made the number of welfare caseloads drop and discouraged marriages for those childless or with an uneligible child people increase their tax credit by divorcing or staying unmarried Diana Tania Fiorillo

12. EITC AND NONCOMPLIANCE People don’t pay taxes intentionally or unintentionally In 1999 30% of credits were claimed in error driven by needless complexity due to unclear instructions Diana Tania Fiorillo

13. REFORMS Common types include: • more generous EITC for 3-child families • reduction of marriage penalties • simplified criteria for eligibility • increase credit for single childless individuals Diana Tania Fiorillo

14. THANKS FOR YOUR ATTENTION! Diana Tania Fiorillo