Making Work Pay

Making Work Pay

Bruce D. Meyer
Douglas Holtz-Eakin
Copyright Date: 2001
Published by: Russell Sage Foundation
Pages: 412
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  • Book Info
    Making Work Pay
    Book Description:

    Since its inception under President Ford in 1975, the Earned Income Tax Credit (EITC) has become the largest antipoverty program for the non-elderly in the United States. In 1998, more than nineteen million families received EITC payments, and the program lifted over four million Americans above the poverty line. Despite the rapid growth of the EITC throughout the 1990s, little has been written about how the program works or how it affects low-income families.Making Work Payprovides the first full-scale examination of the EITC, exploring its effects on income distribution, poverty, work, and marriage.

    Making Work Payopens with a history of the EITC-its emergence in the 1970s as a pro-work, low-cost antipoverty program and its expansion through the 1980s and 1990s. The central chapters in the volume look at the substantial impact of the EITC on work incentives in recent years and show that the program, in combination with welfare reform and a strong economy, has led to an unprecedented increase in the employment of single mothers. In one study, researchers conclude that the EITC-with its stipulation that one family member be a wage earner-was the most important change in work incentives for single mothers between 1984 and 1996, a period when the employment rate of single mothers rose sharply. Several chapters outline proposals for reforming the program, addressing the concerns by policymakers about the work disincentives that rise as benefits fall with increasing income. Finally,Making Work Payexamines how EITC recipients view the credit and what they do with it once they get it. The contributors find that not only does EITC's lump-sum payment increase consumption but it also allows recipients to make changes in economic status. Many families use the end-of-the-year payment as a form of forced savings, enabling them to save for home improvement, a new car, or other purchases to improve their lives, and providing the extra economic cushion needed to move beyond mere day-to-day survival.

    Comprehensive in scope,Making Work Payis an indispensable resource for policymakers, administrators, and researchers seeking to understand the ramifications of the country's largest programs for aiding the working poor.

    eISBN: 978-1-61044-394-4
    Subjects: Business, Political Science, Sociology

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Contributors
    (pp. ix-x)
  4. Acknowledgments
    (pp. xi-xii)
    Bruce D. Meyer and Douglas Holtz-Eakin
  5. Introduction
    (pp. 1-12)
    Bruce D. Meyer and Douglas Holtz-Eakin

    Since its inception in 1975, the federal Earned Income Tax Credit (EITC) has grown dramatically in size, and it is now the largest antipoverty program for the nonaged in the United States. In 1998, 19.7 million families received EITC payments totaling $31.6 billion. As a result, in 1999 the EITC lifted 3.7 million individuals above the poverty line. In addition to directly raising incomes, the EITC has sharply changed work incentives, increasing the after-tax wage by up to 40 percent for those with low earnings. Since the credit is refundable, a person without a tax liability receives it as a...

    • Chapter 1 The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit
      (pp. 15-66)
      Dennis J. Ventry Jr.

      Over the course of the past thirty years, tax expenditures have become increasingly visible components of the U.S. tax transfer system. Although they do not require annual review by the appropriations process, tax expenditures are subject nevertheless to the whims of politics and national mood.¹ The Earned Income Tax Credit (EITC) is a case in point. Enacted in 1975 as a refundable tax offset for low-income workers, the EITC appeared to politicians an attractive, work-oriented alternative to existing welfare programs. It was both an antipoverty and an antiwelfare instrument. It complemented national concerns over welfare caseloads, unemployment rates, and the...

    • Chapter 2 Making Single Mothers Work: Recent Tax and Welfare Policy and Its Effects
      (pp. 69-115)
      Bruce D. Meyer and Dan T. Rosenbaum

      Between 1984 and 1996 there were enormous changes in many of the tax and transfer programs that affect single mothers. These changes dramatically increased the incentive to work. During that period, real dollars received through the Earned Income Tax Credit (EITC), which go primarily to working families with children, increased more than tenfold. The number of children receiving Medicaid increased 72 percent, while the number of covered adults with dependent children increased 27 percent. These Medicaid expansions primarily affected nonwelfare families with incomes near the poverty line, making work more attractive for low-income single mothers. Since 1993, nearly every state...

    • Chapter 3 The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements
      (pp. 116-165)
      David T. Ellwood

      All social policies create incentives, and most create at least some that are undesirable in the eyes of policymakers. The Earned Income Tax Credit (EITC) is unusual in that it creates sharply different incentives for different individuals. For some it serves as a strong work incentive; for others it is a work disincentive. Similarly, the EITC rewards marriage among some and penalizes it among others. In contrast, traditional means-tested benefits usually create unambiguous work disincentives and marriage penalties.

      In this chapter, I exploit the fact that work and marriage incentives have changed differentially for various groups in order to test...

    • Chapter 4 Measuring the Effect of the Earned Income Tax Credit on Marriage Penalties and Bonuses
      (pp. 166-195)
      Janet Holtzblatt and Robert Rebelein

      According to the U.S. General Accounting Office (1996), there are fifty-nine provisions in the income tax code that either penalize or reward marriage.¹ The presence of marriage penalties and bonuses in the income tax code raises at least three concerns. First, one goal of tax policy is horizontal equity, or the equal tax treatment of equals. The presence of marriage penalties and bonuses, however, implies that two couples who are similar except for the existence of a marriage license can be taxed differently on the same amounts of income. Second, marriage penalties and bonuses may affect taxpayers' behavior by distorting...

    • Chapter 5 The Optimal Design of the Earned Income Tax Credit
      (pp. 196-234)
      Jeffrey B. Liebman

      The Earned Income Tax Credit (EITC) is unusual among U.S. cash transfer programs for several reasons: only taxpayers who work are eligible for the credit; payments initially rise with income; and the credit phases out gradually as a taxpayer’s income rises. In contrast, typical transfer programs such as Temporary Assistance for Needy Families and Supplemental Security Income provide their highest payments to households with no other income and then reduce benefits rapidly as a household's income rises.

      The EITC’s distinctive budget constraint causes 75 percent of its dollars to be transferred to workers with annual earnings between $9,000 and $31,000...

    • Chapter 6 Noncompliance with the Earned Income Tax Credit: The Determinants of the Misreporting of Children
      (pp. 237-273)
      Janet McCubbin

      The Earned Income Tax Credit (EITC) was created in 1975, largely to offset the burden and labor force disincentives associated with social security taxes levied on low-income workers (U.S. Senate 1975, 33). In keeping with these goals, the credit was set at 10 percent of earnings up to $4,000. The credit was reduced by ten cents for every dollar of income in excess of $4,000 and was therefore completely phased out when income reached $8,000. The creators of the EITC also hoped that the credit would offset the work disincentives inherent in the welfare system. Because individuals with children are...

    • Chapter 7 Who Are the Ineligible Earned Income Tax Credit Recipients?
      (pp. 274-298)
      Jeffrey B. Liebman

      This year, 19 million families are expected to receive the Earned Income Tax Credit (EITC) at a total cost to the federal government of $30 billion (U.S. House 1998; Office of Management and Budget 2000). The cost of the EITC now exceeds total federal and state spending on Temporary Assistance for Needy Families. Research on the EITC suggests that the program succeeds in transferring income to needy families while maintaining low administrative costs, encouraging the labor force participation of single parents, and having little or no impact on hours conditional on working.¹

      sResearch has also shown, however, that many EITC...

    • Chapter 8 The Earned Income Tax Credit: Expectation, Knowledge, Use, and Economic and Social Mobility
      (pp. 301-365)
      Timothy M. Smeeding, Katherin Ross Phillips and Michael A. O’Connor

      The largest targeted tax-credit program for low-income families is the Earned Income Tax Credit (BITC). In 1997, the EITC cost the federal government $30.0 billion, more than was spent on food stamps or Temporary Assistance for Needy Families in that year. More than 19.8 million taxpaying units benefited from the EITC in 1997. About 80 percent of the benefits were returned to claimants in the form of Internal Revenue Service (IRS) tax refund checks in 1998, and the remainder went directly to reduce tax liability (IRS 1999c). Despite its fiscal size, little is known about the impact of the EITC...

    • Chapter 9 The Effects of the Earned Income Tax Credit on the Seasonality of Household Expenditures
      (pp. 329-365)
      Lisa Barrow and Leslie McGranahan

      From humble beginnings in 1975 as a small program designed to offset the payroll taxes paid by low-income workers, the Earned Income Tax Credit (EITC) has grown into a major income support program. In 1996, the EITC transferred a total of $28.8 billion to more than 19 million families (IRS 1998).

      In contrast with social programs that transfer benefits evenly over the calendar year, including Supplemental Security Income, Food Stamps, and Aid to Families with Dependent Children or the newer Temporary Assistance for Needy Families, the great majority of EITC benefits are paid during the tax-filing period in the calendar...

    • Chapter 10 How Families View and Use the Earned Income Tax Credit: Advance Payment Versus Lump-Sum Delivery
      (pp. 366-392)
      Jennifer L. Romich and Thomas S. Weisner

      In 1990 and again in 1993, Congress approved significant expansions of the previously modest Earned Income Tax Credit (EITC). These increases targeted working families with children. In a 1993 event publicizing the administration’s role in the increases, President Bill Clinton lauded the expansions and celebrated this policy that made work its primary goal. “[The EITC is] not about more governmental or social workers, or more services. It's about more groceries and a car, more school clothes for the kids and more encouragement and hope to keep doing the right thing” (Clinton 1998).

      Analysis of the policy’s effectiveness must examine the...

  10. Index
    (pp. 393-400)