Over the past two decades, the American welfare system has shifted more toward one of “in-work” assistance, which tends to stir up less political resistance than programs often pegged as “handouts.”
The Earned Income Tax Credit (EITC), for example, has become the hallmark safety net for low income families in the United States ever since Bill Clinton expanded the program alongside welfare reform, with the go-ahead from Congressional Republicans. The idea is that embedding work incentives into the tax code is better than simply doling out cash.
And it’s worked pretty well. There’s evidence the EITC has encouraged work among low-income Americans, particularly single mothers.
The EITC is also part of the reason such a large percentage of Americans don’t actually pay income tax — a fact Mitt Romney reminded us of in the infamous video that would come to define his campaign.
But the financial crisis at its aftermath has presented another case study opportunity for the EITC. Researchers are looking into how it held up during the hard times. In a new paper “Do In-Work Tax Credits Serve as a Safety Net?” economists Marianne Bitler, Hilary Hoynes, and Elira Kuka found that the program did not stabilise income for single mothers when the unemployment rate spiked. It did help married couples. From the paper:
Our results show that for the largest group of EITC recipients, single mothers with children, there is a negative but statistically insignificant relationship between unemployment rates and their use of the EITC. There is therefore no evidence that the EITC stabilizes income for this group; in fact the point estimates suggests that the EITC acts as an income de-stabilizer. On the other hand, for married couples with children (and to a lesser extent the childless), use of the EITC is found to rise in recessions and thus the credit acts as an automatic stabilizer for this group. These results can be understood within the context of labour supply theory and in particular connect to the different predictions for how earnings changes for one- versus two-earner households as well as underlying differences in the distribution of income across the different family types.
“Singles with children, due to being in one-earner families and having relatively low earnings, are at higher risk of losing the EITC in the event of an adverse labour market shock,” they conclude.