Specifically- an expanded deployment pays for itself and has externalizing benefits.
Bastian and Jones 21 (Jacob Bastian is an Assistant Professor of Economics at Rutgers University, New Brunswick, New Jersey. Prior to moving to Rutgers University, Jacob completed a two-year postdoc at the University of Chicago’s Harris School of Public Policy and a Ph.D. in Economics at the University of Michigan. Jacob's research focuses on how public policy can reduce poverty, increase economic opportunity, and affect social attitudes, while also identifying unintended consequences. Specifically, his research has looked at the Earned Income Tax Credit (EITC) and finds that this program helped lead to the rise of working mothers in the 1970s, improved the education and employment outcomes of children of EITC recipients, changed social attitudes about the role of women in society, and had positive effects on marriage and fertility. Magaret Jones is an Assistant Professor of Economics at Emory College. PhD, Queen's University at Kingston, 2018 MA, Economics from Dalhousie University, 2012 BA, Mathematics and Economics from Dalhousie University, 2009 “Do EITC expansions pay for themselves? Effects on tax revenue and government transfers” April 2021 Journal of Public Economics Volume 196, April 2021, 104355// ZX
We find that the EITC helps “pay for itself” through increases in tax revenue and decreases in government transfers in the following year. Average-treatment-effect estimates show that the EITC has a self-financing rate of 83 percent, so that each $1 of EITC spending has a net budgetary cost to government of $0.17. Instead of costing $73 billion, the 2017 EITC’s net cost was about $12 billion, costing taxpayers less than the school lunch and breakfast programs. If anything, the EITC’s net cost appears to be zero or even negative when longer-run and spillover effects are accounted for.
We find that recent EITC expansions also continue to largely pay for themselves. Additional EITC expansions today—for adults with or without children—would likely continue to increase labor supply, decrease poverty, and improve the well-being of lower-income families at a cost much lower than the budgetary cost.
Every $1 in EITC benefits is associated with a $0.69 decrease in other public benefits (=243/349) and a researcher not accounting for decreased benefits would conclude that a $1,000 increase in MaxEITC increases family resources of $908 (=$558+$349), instead of $666 (=$558+$349-$243). One possible reaction to these results is “so does the EITC not help families as much as we thought?” Many EITC papers implicitly account for this fact by using after-tax-and-transfer income (e.g., ). However, research not fully accounting for government transfers will overstate the effect of the EITC on family resources and understate the impact of income on outcomes for lower-income families and children by around 36 percent (=(908–666)/666).
Our results contribute to a newer literature on how policies can help “pay for themselves,” as finds for Medicaid, finds for Pell Grants, finds for childcare subsidies in Norway, and and find for a Canadian welfare reform experiment. While we focus on the EITC’s net cost over a one-year period, the program’s long-term cost may be even lower—due to cost-savings via positive social outcomes, such as improved health and reduced crime—and constitute a rich area of study for future research.
Lower-income households deciding whether to join the labor force face high marginal and average tax rates, often over 50 percent and occasionally over 100 percent, when government transfers is accounted for (, ). The EITC acts as a tax cut on these lower-income households, decreasing these high tax rates by up to 45 percentage points. For intuition, consider the : since the EITC largely pays for itself, this suggests that the EITC moves households from near the top of the Laffer curve to the left of the peak. (Among unmarried women, the EITC more than pays for itself, suFggesting that these mothers started to the right of the Laffer curve peak.)
The net cost of the EITC is much lower than previously thought and may be a Kaldor-Hicks-improving policy. In fact, under some assumptions, if the long-run and spillover benefits of the EITC are sufficiently large to completely offset their cost to government, then no taxpayer dollars would be required to fund the EITC, and the program would be a Pareto-improving policy. The EITC appears to have a positive effect on social welfare, and additional EITC expansions today would likely increase social welfare even more.