Previous research has significantly understated the number of families lifted out of poverty by the federal Earned Income Tax Credit (EITC), according to a new study by UC Berkeley professor Hilary Hoynes and her colleague Anker Patel. Using a more comprehensive analysis than past studies, Hoynes and Patel find that the credit cuts poverty nearly twice as much as previously thought.
The federal EITC can reduce poverty in two ways: by directly boosting incomes through the credit itself and by indirectly raising incomes by encouraging people to work and therefore earn more. (As we show in this report, research shows that the federal EITC significantly boosts employment among single mothers.) Hoynes and Patel’s study is the first to estimate the credit’s impact on poverty by taking into account its direct and indirect effects on income. This more complete analysis shows that the number of single mothers and their children — the primary beneficiaries of the credit — who are lifted out of poverty nationwide nearly doubles from 1.8 million (when considering only the direct effects of the credit) to 3.4 million (when including the credit’s indirect effects).*
What’s even more striking about this study is that it controls for many factors in addition to the EITC that likely affect family income, including factors that reduced some families’ incomes during the study period from 1984 to 2013, offsetting the benefits of the credit. For example, the authors account for the fact that welfare reform in the mid-1990s substantially curtailed cash assistance for families with children. In addition, they account for the fact that some parents who decide to work more because of the EITC lose income from public supports that phase out at higher levels of earnings. In other words, the study’s findings show that even the net effect of the federal EITC on families’ incomes (after subtracting any income lost from public benefits) is substantial.
Hoynes and Patel make another important contribution to our understanding of the federal EITC by showing the extent to which the credit boosts families’ incomes across the income distribution. They find, for example, that the credit provides the greatest benefit to families with incomes around 75 percent to 150 percent of the official federal poverty line (equivalent to incomes of about $14,300 to $28,600 for single parents with two children). In contrast, the federal EITC does not appear to boost incomes enough to significantly reduce the number of families living in deep poverty — those who have incomes below half the poverty line — when both the direct and indirect effects of the credit are considered. These findings are not surprising, according to the authors, because the federal EITC targets the largest credits to families with incomes near 100 percent of the poverty line. (For example, a single parent with two children qualifies for the maximum federal EITC if her income is between roughly 72 percent and 94 percent of the poverty line.) In addition, other research suggests that people with very low incomes who are eligible for relatively small credits, are less likely to claim the federal EITC in part because they may not have a personal income tax filing requirement.
What does this research mean for California’s new state EITC? First, it suggests that evaluations of the credit won’t be complete unless they examine the extent to which the credit boosts incomes by encouraging work after subtracting any income losses from declines in public supports. This latter factor is particularly important to consider because benefits from public supports, such as CalWORKs, phase out as families earn more.
Second, this study suggests that California’s EITC, which is targeted to families living in deep poverty, may work best in combination with policies that address common barriers to work. Hoynes and Patel suggest that the federal EITC is less effective at lifting people out of deep poverty because this group has “little attachment to the labor market.” Indeed, research shows that a large share of people in deep poverty have not worked in the past year, as we point out in this report. This may be due to the fact that this group tends to face multiple, significant challenges, including homelessness, mental health problems, and criminal records, that make finding and maintaining steady employment difficult. If these challenges largely explain why substantial shares of people in deep poverty are not working, then the additional incentive to work provided by California’s EITC may not be sufficient, on its own, to boost employment among this group. Maximizing the credit’s effectiveness may require additional strategies to target those barriers, such as increasing support for housing assistance programs or providing greater protections for job applicants with criminal records to reduce discrimination in hiring.
— Alissa Anderson
*These figures represent a subgroup of single mothers — those ages 24 to 48 who are not ill, disabled, or going to school and who have no more than some college education. These women, together with their children, account for fewer than one in five people in poverty.