Research That Matters (January 17 - 20, 2008)

About 19 million taxpayers received the Earned Income Tax Credit(EITC) in tax year 2003, at a total cost to the federal government of about 34 billion dollars. In a series of major expansions starting in 1987, the EITC has become a central part of the federal government's work-incentive policy and anti-poverty policy among working poor.

In this paper, I examine the impact of the EITC on work and poverty among single mothers using the March CPS data of the fiscal year 1991~2004. The EITC affected an easily identifiable group, single women with children, but is predicted to have had no effect on another group, single women without children (low income families without children became eligible for EITC from 1994. However, most EITC payments still go to taxpayers with at least one qualifying child). I therefore compare the change in work and poverty among single women with children to the change in work and poverty among single women without children by using the differences-in-differences(DD) method. In order to estimate the EITC's effects on work, I use labor force participation(LFP), employment, hours of work, and earnings as dependent variables. Income, poverty rate, and the poverty gap are the dependent variables to estimate the EITC's effects on poverty.

In terms of the EITC's effects on work, I find that the EITC significantly increased the LFP and employment among single women with children. However, I find no effects of EITC on the hours of work and earnings. In terms of poverty, the results show that the EITC significantly decreased poverty rate among single women with children. However, no effects are found for income and the poverty gap. Overall, the EITC appears to produce little distortion of work incentives among single women with children. The EITC shows, however, somewhat unexpected effects on hours of work, earning, and poverty.

Moreover, the data indicate that over 80 percent of single mothers is in the phase-out range or stationary range, where the amount of EITC refunds does not change or decreases. Single mothers who are in these ranges may reduce or may not change their LFP or earnings so that their incomes may also decline. Over the period of 1991~2004, the percentage of single mothers who are in the phase-out range is continuously increasing, while the percentage of single mothers who are in the phase-in range is decreasing over the same period. This fact has specific implications for the design of the EITC program.