The Earned Income Tax Credit (EITC) under the Tax Relief Reconciliation Act (EGTRRA) of 2001: The Effects of the EITC on Work and Income among Less-Educated Married Mothers

A distinguishing feature of recent changes to the US welfare system is an increased focus on working families and reliance on the tax system to transfer dollars to needy families. Since the 1970s, the Earned Income Tax Credit (EITC) has been expanded to become the largest cash-transfer program for low-income families with children. Advocates of the EITC argue that, unlike traditional welfare, the credit helps promote work among the working poor. Theory suggests, however, that primary earners (men) may work more but secondary earners (women) may work less in response to the EITC. Previous empirical research indicates that a substantial percentage of low-income working mothers are in the stationary range or phase-out range, where the amount of EITC refunds does not change or decrease, respectively. Consequently, working mothers may not change work status or may work less and as a result their total earning or total income may not change or may decline.

The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) implemented a measure in which the EITC provides marriage penalty relief—increasing the beginning and ending points of the phase-out range of the EITC gradually from 2002 to 2008 for married taxpayers who file a joint return.

In this study, we examine the impact of the first implementation phase of the 2001 EGTRRA on labor supply and earnings among less-educated mothers using the multiple years March Current Population Survey (CPS) data. The CPS data span fiscal years 1999 to 2001 and 2003 to 2005. We exclude the FY 2002 from analyses, the first year after the 2001 EGTRRA, to allow taxpayers time to adjust their behaviors. Employing the differences-in-differences (DD) method, we compare changes in labor force participation, earning, work hour and income among “less-educated mothers with spouses” (program group) to those outcomes among “highly-educated mothers with spouses (comparison group).”

The research findings suggest that, controlling for personal and household characteristics, labor market conditions and other state-specific welfare policies, the 2001 EGTRRA reduced labor force participation, earning and work hour among less-educated married mothers. As a result, the income decreasing effect is also found among them. These findings imply that the EITC is effectively subsidizing less-educated married mothers to stay home, and therefore, have implications for the design and the administration of the EITC.