The incentive works: One study found that a $1,000 increase in the EITC led to a 7.3 percentage point increase in employment and a nearly 10 percentage-point reduction in the share of families in poverty. Its benefits are far-reaching, too. For lower-education single mothers, an additional $1,000 in the EITC is associated with a 6.7 to 10.8 percent drop in the share of infants being born with low birth weights, with bigger impacts for black mothers.
New research by David Neumark and Peter Shirley of the University of California, Irvine, shows that the effects are not just short-term, either. The EITC does not just boost earnings and reduce poverty rates when it is received, but improves the lifetime earnings trajectories of unmarried women with kids. A 10 percentage-point increase in the EITC rate for a single mother with two children at age 20—meaning that for every additional dollar a woman earned, she would get 10 more cents from the EITC—increased her earnings by 3.4 percent and her hourly wages by 1.6 percent at age 40, likely stemming from several months’ worth of additional work experience translating into higher wages and income in the longer run, they found.
“What this shows is that work incentives lead to the accumulation of skills, so that later your earnings are higher,” Neumark, an economist well-known for his studies of the minimum wage, told me. “It is not that you’re working some minimum-wage job because of the EITC, but you’re actually advancing in the labor market. It’s not that your earnings plus the EITC are getting higher, but your earnings alone are getting higher, and they’re rising over time.” The tax policy, in other words, improves workers’ skills and the country’s stock of human capital.
“I run something called the Economic Self-Sufficiency Policy Research Institute,” he added. “I don’t know exactly what ‘economic self sufficiency’ means. But increasing your independent earning power over time and decreasing your dependence on government programs, even if government programs are still helping you—that seems like it fits.”
But the Republican tax legislation does not make the EITC more generous, as many Democratic and some Republican legislators have long called for. More than that, it actually erodes the value of the EITC, since the credit is now indexed to a less-generous measure of inflation. Chuck Marr of the Center on Budget and Policy Priorities, a Washington-based think tank, has estimated that a married couple with two kids earning $40,000 a year would see their EITC payment fall from $4,974 to $4,652 in 2027. Many changes in the legislation are temporary but that one is permanent, he notes.
Now, the White House is turning to welfare reform. “We will have done tax cuts, the biggest in history, health care, phenomenal health care,” President Donald Trump said in a major speech on his policy priorities in Missouri last month. “Welfare reform, I see it, and I’ve talked to people. I know people that work three jobs and they live next to somebody who doesn’t work at all. And the person who is not working at all and has no intention of working at all is making more money and doing better than the person that’s working his and her ass off. And it’s not going to happen. Not going to happen.” Republicans have discussed adding work requirements and more-stringent time limits to safety-net programs such as food stamps and Medicaid in order to induce more poor Americans to get a job.