AT EITC CP - Michigan 7 2023 CFMP

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EITC Fails
All predictive models blur the line- an EITC is ineffective and overstated, with other expansions footing the bill.
Verbruggen 19 (Robert VerBruggen is a fellow at the Manhattan Institute where he provides policy research, writes for City Journal, and contributes to special projects and initiatives in the President’s office. Having held roles as Deputy Managing Editor of National Review, Managing Editor of The American Conservative, Editor at RealClearPolicy, and Assistant Book Editor at The Washington Times, VerBruggen writes on a wide array of issues including economic policy, public finance, health care, education, family policy, cancel culture, and public safety.) “SEPTEMBER 25, 2019 The Ineffective Earned Income Tax Credit” SEPTEMBER 25, 2019 https://ifstudies.org/blog/the-ineffective-earned-income-tax-credit#:~:text=An%20impressive%20new%20paper%20from%20Princeton's%20Henrik%20Kleven%2C%20however%2C%20argues,mean%20we%20should%20repeal%20it. // ZX
The Earned Income Tax Credit (EITC) is a major part of America's work-focused safety net. At the end of each tax year, parents who work but have low incomes can receive up to $6,557 (as of 2019). Conservatives like it because it rewards work; liberals like it because it helps poor families. Some on both sides have suggested expanding it, especially for childless workers, who receive far smaller credits than those with children (just $529 this year).
An impressive new paper from Princeton’s Henrik Kleven, however, argues that the pro-work impact of the EITC has been hugely overstated. Indeed, it implies that the credit has done essentially nothing to increase work. This doesn't mean we should repeal it. But it does mean we should give serious thought to reworking how it operates.
Researchers have long thought that the expansion of the EITC in 1993 played an important role in the dramatic increase in single mothers' labor-force participation in the years that followed. However, it's always been difficult to separate the impact of the EITC from that of welfare reform and the overall strong economy. The paper argues compellingly that these latter two factors are the ones that really mattered.
The study is extensive and complicated, featuring a variety of arcane statistical exercises laid out in fancy regression notation. But many of its main points are captured in this simple chart, depicting the labor-force participation of single women with varying numbers of children.
Let's walk through some details that won't be apparent unless you know a lot about how welfare policy changed during this time period.
For one thing, it's clear that something very unusual happened in the mid-1990s. In just a few years, single mothers as a group closed the gap they'd previously had with single women without kids. By the turn of the century, single moms with one kid were working more than childless single women. Before and after this period, all these women experienced broadly similar trends: increasing participation in the ’70s and ’80s, declining participation in the current century.
That in itself raises uncomfortable questions for the EITC because 1993 wasn't the only time it expanded. There was also a big boost in 1975, when the credit was first established and was made available only to those with kids, followed by smaller hikes in 1986, 1990, and 2009. Why did none of these boosts affect the gap between single mothers and women with no kids, when the credit has always been strongly targeted at the former?
The other troubling fact is that single mothers seemed to have a stronger response the more kids they had. Those with three or more kids increased their participation by about 20 percentage points; they’re not pictured on the chart, but women with four or more kids had an increase of almost 30 points. Meanwhile, those with one child saw growth of 10 percentage points; those with two, 15.
Now, women with fewer kids had less growth potential because they already worked more—for instance, it would have been impossible for single moms with one kid to have a 30-point boost because that would have put them above 100% labor-force participation. But the pattern is still striking and clear.
This is damning to the EITC because the increases in labor-force participation do not match the growth of the credit. In 1993, Kleven notes, the credit
increased sharply for all families with two or more children and only modestly for families with one child (relative to those without children). This would predict a sharp divergence in the effects between those with one and two children and little divergence elsewhere.
In other words, the EITC can’t explain why women with three or four kids had a far stronger response than those with two. The observed pattern makes more sense as an effect of welfare reform, which imposed work requirements and time limits on much bigger welfare payments to women with more kids.
One might reply that we started to see some increases in labor-force participation even before 1996 when the federal welfare-reform law was passed. Indeed, the improvement seems to start right when the EITC was expanded. However, in the years leading up to federal welfare reform, many states implemented similar policies through waivers. And in another analysis, Kleven statistically controls for the presence of these waivers, as well as local unemployment rates, finding that the early increase disappears. This suggests that the pre-1996 improvement was concentrated in the states with waivers, not spread throughout the entire country as one would expect if it resulted from the nationwide EITC expansion.
Further, just as some states had welfare reform before it was implemented on the federal level, some states have boosted the EITC on their own. In yet another analysis, Kleven analyzes the impact of state changes to the credit and finds that they had basically no effect on how much single women with kids worked.
How could giving people more money to work fail to increase the chance of them working? There are several possibilities. For one thing, many people eligible for the credit either don’t even know what it is or don't fully understand how it functions, meaning they can't change their behavior to maximize it. And two, it's given out just once a year at tax time, so it doesn't immediately reinforce the behavior it's trying to encourage.
As Kleven notes, he is challenging a fairly strong consensus among other researchers here. Perhaps someone will be able to show that he is wrong. But his results make a strong case—so if he's right, what does that mean for policy?
One can defend the credit even if it doesn't increase work. The EITC made sure that working families had more money regardless of the incentives it created (or didn’t), helping to ensure that those pushed away from welfare and into jobs in the 1990s had an easier time making ends meet.
But this paper should encourage us to think about more effective ways of spending this money. Even if we spent the exact same amount supporting the exact same families, we could do so in a way that makes it clearer why the recipients are getting the funds. There has long been talk of turning the EITC into a wage subsidy that appears in each paycheck rather than an annual windfall, and this new evidence buttresses the case for this approach. It would help poor families to budget and be more likely to incentivize work.
The paper also, it must be said, strengthens the case for work requirements. Foes of welfare reform have often sought to credit the EITC for the gains of the mid-1990s, and it seems they are probably wrong to do so. Going forward, cash welfare's work requirements should be maintained, and similar policies should arguably be strengthened in other programs such as food stamps and housing.
Our welfare system has not seen serious reform in a generation, and those seeking to fix it today are pulling in many different directions. With this entry into the debate, Kleven has made a compelling case that some policies work and others do not.
The complexity and redundancy of the EITC makes it the worst alternative.
Bruenig 20 (Matthew Bruenig is an American lawyer, blogger, policy analyst, commentator, and founder of the left-leaning think tank People's Policy Project.) “The Myths of the Earned Income Tax Credit” May 18th, 2020 https://www.peoplespolicyproject.org/project/the-myths-of-the-earned-income-tax-credit/
Most policy analysts believe that the Earned Income Tax Credit (EITC) substantially reduces poverty and increases employment in an administratively efficient and well-targeted way. This is not true. In this paper, I show that simple mismeasurements have greatly overstated the efficiency and effectiveness of the EITC program. To determine how much the EITC reduces poverty, researchers run a couple of simple calculations using the Annual Social and Economic Supplement (ASEC) of the Current Population Survey (CPS). In the first calculation, they determine how many individuals have a disposable income that puts them below the poverty line based on the Supplemental Poverty Measure (SPM). In the second calculation, they do the same thing, but this time with the EITC subtracted from each person’s income. The difference between the two numbers, which was 5.6 million people in 2018, is then declared to be the number of people pulled out of poverty by the EITC.
Unlike other benefit incomes, the EITC values in the ASEC are not based on survey questions. Instead, the Census imputes them by running a tax simulation on each unit’s reported earnings. This approach has three problems that cause the antipoverty impact of the EITC to be way overstated.
Wrong Year Problem. The ASEC counts EITC benefits that are received in the subsequent year as having been received in the current year. For example, EITC benefits that were paid out by the IRS in early 2019 are counted in the ASEC as if they were received in 2018. This approach allows the EITC to appear as if it is perfectly targeted at those just around the poverty line. In reality, it is not.
Nonparticipation Problem. The ASEC assumes everyone who is eligible for the EITC receives the EITC. In reality, only 78 percent of the eligible population receives the EITC.
Tax Preparation Fee Problem. The ASEC assumes EITC beneficiaries receive all of the benefits that are paid to them. In reality, 60 percent of EITC beneficiaries use a paid tax preparer that charges a fee equal to around 13 to 22 percent of the benefit.
To fix these problems, I adjusted the ASEC’s EITC imputations to make them more accurate. The differences between my adjusted measure and the conventional measure are summed up in the table below.
On average, the conventional measure shows that the EITC reduces the poverty rate by 1.3 percentage points. Under the adjusted measure, it is 0.7 percentage points, which is 47 percent lower.
This finding is consistent with a Census study published last year that linked IRS administrative data to ASEC data to determine the degree to which the ASEC data overstates the poverty reduction. That study found that the poverty reduced by the EITC is around 33 percent lower when using the IRS administrative data as compared to using the ASEC imputations.
However that study only addressed the Nonparticipation Problem. It did not address the Wrong Year Problem or the Tax Preparation Fee Problem. Had it done so, it would have probably reached the same conclusion I have here, which is that the antipoverty impact of the EITC is about half of what is typically reported.
EITC Administrative Costs Are Way Understated
As noted already above, around 60 percent of people who receive the EITC use a paid tax preparer and that preparer charges a fee equal to 13 to 22 percent of their benefit. EITC proponents frequently tout the extraordinarily low administrative costs of the EITC program by citing to IRS reports that say EITC administrative costs are less than 1 percent of benefits disbursed. But these reports only count IRS administrative costs. They ignore the EITC’s private administrative costs and in fact count those costs as if they are benefits received by individuals even though they are not.
Including the private administrative costs reveals that around 11 percent of EITC money goes to administration, making it one of the least efficient welfare programs in the country.
EITC benefits phase in based on earnings, meaning that the more labor income you earn, the more EITC benefit you receive up to a certain point. This phase-in structure incentivizes people to work more, which is supposed to be one of the main appeals of the EITC. But it does not appear that these work incentives actually result in more work being done. Researchers have gone back and forth on this question over the years, but the most convincing study on the topic, which was recently published by Henrik Kleven, shows that EITC does not increase employment or labor force participation.
In his study, Kleven analyzed 27 state-level EITC expansions and all five federal EITC expansions. Using a synthetic control approach, Kleven found that none of the state-level expansions had any effect on employment. Kleven also found that only one of the five federal expansions—the 1993 EITC reform—is associated with any increase in the labor force participation of the single-mother target population. But that EITC reform coincided with new state-level eligibility restrictions for Aid to Families with Dependent Children and a booming macroeconomy. When those confounding factors are taken into account, Kleven shows the 1993 EITC reform also had no effect on labor force participation.
Kleven’s explanation for why there is no demonstrated increase in work is that the EITC benefit is so complicated and obscured that most potential beneficiaries do not realize it exists or do not understand how it works. This explanation is backed up by surveys of individuals showing precisely this.
Beyond Kleven’s demonstrations, it is also worth noting for policymakers that, even if someone believed the EITC increased work in the past, there is no reason to believe that future expansions will continue to have that effect without limit. And, of course, when the economy is demand-constrained, meaning there are more jobseekers than job openings, the EITC cannot increase the amount of work that is being done, only change its composition.
The case for the EITC, which has hardened into a near-consensus in the left-of-center DC policy community, is largely built on myths and mismeasurements. The EITC has not historically increased employment or labor force participation and there is even less reason to believe that further EITC expansions from our current point would do so. The EITC is not an especially efficient program. In fact, it is among the least efficient welfare programs in the country once its unique private administrative costs are counted. Finally, the standard measurements of how much the EITC reduces headcount poverty are significantly inflated because those measures use EITC benefits from the wrong year, overstate program participation, and understate administrative costs.
The best way to expand the US welfare state going forward is not to enact more EITC-like measures, but to instead use more efficient and more effective universal programs.
Independently, a comparative model shows a BI as more effective than expansion of EITC.
Hamilton 18 (Leah Hamilton is Associate Professor of Social Work at Appalachian State University, USA. She is an Executive Committee member for the Basic Income Earth Network and President of the American Civil Liberties Union of North Carolina.) “Harvard Economist Argues for Replacement of the EITC with a Basic Income” Dec 21, 2018 https://basicincome.org/news/2018/12/united-states-harvard-economist-argues-for-replacement-of-the-eitc-with-a-basic-income/ // ZX
A new working paper released by Growthpolicy, which disseminates research by Harvard scholars on the topics of economic growth, employment, and inequality, argues that a universal basic income is superior to current low wage subsidies in several ways. The author, Associate Professor of Economics at Harvard, Dr. Maximilian Kasy contends that these subsidies, specifically the Earned Income Tax Credit (EITC) in the United States, comparatively carries several economic, moral, and political disadvantages.
The EITC is a subsidy to low income working families and increases with income to specific thresholds, depending on household size. The credit has been found to incentivize work, reduce welfare dependency, improve child health and educational outcomes, and lifts roughly 6.5 million people above the official poverty line. Kasy argues that a basic income could produce similar outcomes while eliminating several important drawbacks. First, because the demand for labor is finite, especially in times of recession, incentivizing some workers to work more, which ultimately creates fewer jobs overall. In other words, if a service sector employee works overtime hours in order to maximize the EITC credit, her employer will not need to hire an additional employee to cover those hours. Further, multiple researchers have found that subsidizing low wage work via the EITC plus cuts to traditional welfare, in the 1990s, decreased pressure on employers to offer a living wage and ultimately contributed to the declining value of the minimum wage. In essence, Kasy argues, the EITC is a subsidy to employers. Conversely, a UBI would increase the bargaining power of workers and wages would thusly rise.
Dr. Kasey also asserts that a basic income would reduce the coercive power that employers, abusive partners, and a paternalistic welfare system hold over economically marginalized populations. Low wage workers, survivors of domestic violence, and mothers at the mercy of intrusive welfare policy would have an increased ability to walk away from exploitative situations. Furthermore, a basic income would fairly compensate child and elder care work, which is largely done by women and goes unrewarded in our current wage-based system.
Finally, as many have argued, Dr. Kasey finds that a universal basic income carries potentially greater political stability than means-tested benefits. For example, while the passage of Social Security in the 1930s and Medicare in the 1960s was met with cries of “Socialism!,”, these were soon widely popular across the political spectrum and are rarely considered as potential areas for federal budget cuts.
---And the actual study
Kasy 18 (Maximilian Kasy Professor of Economics, Oxford University) “Why a Universal Basic Income Is Better Than Subsidies of Low-Wage Work” November 9, 2018 https://www.filesforprogress.org/pdfs/UBI_EITC_Kasy_DFP_Working_Paper.pdf // ZX
In this paper, we compare subsidies of low-wage work, such as the Earned Income Tax Credit (EITC), to unconditional cash transfers—or what is commonly referred to as a universal basic income (UBI).2 The EITC helps families with low earnings but does not provide any support to those without earnings. It is an extremely popular policy because it redistributes income to low-earning families while encouraging work. In contrast, a UBI provides unconditional support to everyone and is often combined with a progressive tax on earnings. In this paper we argue that a UBI would be preferable to subsidies of low-wage work on economic, moral, and political grounds. The economic arguments for a UBI are twofold: • First, subsidies of low-wage work, such as an EITC, distort incentives; they cause people to work more than they otherwise would. A UBI would reduce the resulting inefficiency, so that there would be a bigger economic pie to distribute, and more money would go to those who need it. In this paper, we call this the “magic bucket”: the idea that by moving from a world in which we provide subsidies of low-wage work to one in which we provide universa

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