The transient’s key findings are:
- The Earned Revenue Tax Credit score (EITC) encourages low-income folks with children to work – these with out children get a a lot smaller credit score.
- Earlier EITC analysis has centered on youthful households, however some analysts recommend an expanded childless credit score might increase work amongst close to retirees.
- This examine finds that elevating the EITC by $1,000 would produce a modest rise in employment amongst single girls ages 55-64.
- Nevertheless, this influence is way smaller than that for youthful single girls, maybe as a result of older girls have increased earnings or extra well being limitations.
- Thus, an expanded EITC would primarily profit youthful staff, although with a optimistic facet impact for at the least some older staff too.
Introduction
The Earned Revenue Tax Credit score (EITC) – a refundable credit score that rises with earnings up to a degree earlier than phasing out – is likely one of the federal authorities’s largest poverty discount packages. The EITC’s design – which yields no profit to non-workers – has been discovered to encourage employment amongst lower-income people. This uncommon mixture of poverty discount and work encouragement implies that enlargement of the EITC has lengthy loved bipartisan assist. One of the crucial frequent recommendations for enlargement is a rise within the dimension of the credit score for childless households, which is at present so small that few folks use it.1 Certainly, a tripling of the childless profit was a part of a short lived package deal enacted through the COVID pandemic.2
An enlargement of the childless profit is often framed as a boon for the well-being of youthful, low-income staff. Nevertheless, some have identified that one other profit could also be to encourage low-income people approaching retirement – who are sometimes prone to insufficient retirement sources – to increase their careers.3 For the reason that overwhelming majority of staff close to retirement – outlined right here as ages 55-64 – shouldn’t have dependent kids, they might profit from such an enlargement. Nevertheless, as a result of the present EITC is used primarily by these with kids, no analysis has centered on how older people may reply to any enlargement. However, roughly 15 % of people close to retirement do have dependent kids, and this transient makes use of them as a base for an evaluation of how older people responded to previous expansions relative to their youthful counterparts.4
The dialogue proceeds as follows. The primary part supplies background on the EITC. The second part discusses the methodology used to discover the influence of EITC expansions on older staff, and the third part discusses the outcomes. The ultimate part concludes that whereas previous EITC expansions doubtless have inspired some older staff to increase their careers, the impact is important only for single girls and solely at a 3rd the speed of their youthful counterparts. Therefore, expansions of the childless credit score must be thought of primarily within the context of youthful staff, however with the popularity that such an enlargement will doubtless encourage at the least some older people to work longer.
Background on the EITC
The EITC began as a small, momentary provision in 1975, however enlargement over time has made it one of many largest federal antipoverty insurance policies.5 The credit score is refundable, in order that it might enhance the revenue obtainable to a family as an alternative of merely decreasing its tax burden. The essential construction of the EITC is illustrated in Determine 1, utilizing the 2019 guidelines for example (the evaluation stops that 12 months to keep away from momentary adjustments in EITC guidelines throughout COVID). The determine exhibits 4 distinguished options of this system. First, as talked about above, the EITC could be very small for households with out dependent kids.6 Second, the EITC will increase with the variety of dependent kids. Third, the credit score will increase as a family goes from no earned revenue as much as a reasonable revenue earlier than plateauing. And fourth, the credit score is regularly phased out as earned revenue will increase. Mixed, these 4 options imply that the EITC at present impacts primarily low-income households with kids, typically single moms.
As a result of the EITC solely applies to staff, it goals to encourage folks to go from not working to working. Analysis on the subject strongly means that the coverage achieves this objective, particularly for youthful single dad and mom.7 However, little analysis to this point has centered on the EITC’s impact on older staff, although non-EITC-based analysis has advised that they might reply otherwise than youthful people to tax incentives.8 The rationale for this lack of focus is easy. Simply 15 % of people ages 55-64 nonetheless have dependent kids. Nonetheless, although small in proportion, this group who do have dependent kids can function a base for analysis.
Methodology
This transient makes use of the Present Inhabitants Survey (CPS) from 1988-2019 and follows the methodology of Bastian and Jones (2021). That paper exploits variation within the dimension of the EITC each over time and throughout households with totally different numbers of dependent kids. Determine 2 exhibits this variation and illustrates two traits. First, in actual phrases, the utmost dimension of the EITC credit score has elevated because the Eighties, with discrete jumps in 1991, 1994, and 2009. Second, the utmost credit score has diversified extra by the variety of kids in a family as households with extra dependent kids got bigger advantages relative to these with fewer.
The evaluation compares the employment of people with totally different entry to the EITC, utilizing the utmost credit score that every group can obtain as a proxy for program generosity. Though Determine 2 exhibits that giant jumps in EITC advantages happen just some instances, these adjustments introduce substantial variation within the most profit throughout households. For instance, in 1987, households with dependent kids obtained a modest most credit score of $1,915 (in 2019 {dollars}), no matter their household dimension. By 1996, that quantity for households with a single youngster had almost doubled to $3,513, and households with two or extra kids had seen their most profit triple to $5,796. Additional separation occurred for households with three or extra kids in 2009, once they obtained a virtually 20-percent increase of their most profit. Throughout the pattern thought of right here, the typical most EITC is $2,697, with an ordinary deviation of $2,334.
A regression is used to check the employment charge of people dealing with totally different most EITC advantages, controlling for variety of kids, schooling, race, age, state of residence, and 12 months noticed. Regressions are run solely on these with a highschool diploma or much less, as they’re most definitely to be impacted by any enlargement of the EITC primarily based on their decrease earnings ranges.
Prob(Employment) = f(maxEITC, kids, race, schooling, age, 12 months, state of residence)
This method takes benefit of the truth that households with the identical variety of kids face totally different advantages at totally different instances, whereas households on the similar cut-off date face totally different advantages primarily based on their variety of kids. So, for instance, to the extent that people in households with three versus one dependent youngster work much less in 1987, the regression asks: did that distinction change when a three-child family obtained a relatively bigger EITC profit in 2010? Utilizing this method, Bastian and Jones report that the EITC considerably will increase the employment charge of ladies, with the impact concentrated amongst single girls.9
The query right here is, does this outcome differ primarily based on the age of the person? Thus, the evaluation is carried out individually for staff ages 25-54 and 55-64. As a result of the consequences of this system doubtless differ for ladies relative to males (who are likely to earn extra), the evaluation can also be accomplished individually by gender. And, as a result of the EITC can influence single versus married households otherwise, the evaluation is additional separated by marital standing.10
Outcomes
Earlier than turning to the regression outcomes, Desk 1 highlights key traits of the pattern by age. The older people are much less more likely to be employed, to have dependent kids, and to be Hispanic, and barely extra more likely to be highschool dropouts.
Determine 3 highlights the primary outcomes of the regression evaluation, with full leads to the Appendix. The determine exhibits how the assorted teams’ chance of employment is anticipated to answer a $1,000 enhance within the highest EITC profit obtainable to them. For ladies, the outcomes recommend that older singles could be anticipated to extend their likelihood of working by 1.5 proportion factors, which is statistically important. Nevertheless, the scale of the impact is considerably smaller than for youthful single girls, whose employment could be anticipated to extend by 5.5 proportion factors. This outcome might stem from the truth that older girls have extra work expertise and better earnings and so are much less affected by expansions. Or, the decrease impact might replicate extra well being limitations amongst this older group.11
The impact for older single males is analogous in magnitude to single girls, however insignificant statistically. This insignificance is probably going as a result of the pattern of single males ages 55-64 is simply 60 % the scale of single girls of this age, each as a result of increased mortality of males and the (associated) undeniable fact that males on this age bracket usually tend to be married. Youthful single males are considerably affected however at a decrease charge than youthful single girls, once more doubtless as a result of their increased earnings.
Married girls in each age brackets should not predicted to be considerably affected. Such a discovering is frequent for younger ladies at the least, as married {couples} typically earn an excessive amount of to qualify for even the expanded variations of the EITC. Plus, if a lady has decrease potential earnings than her husband, he often is the one to decide on to work for wages and declare the EITC. Certainly, a optimistic important impact is discovered for youthful married males. Older married males appear to not be affected, doubtless as a result of their increased earnings typically push them out of EITC eligibility no matter whether or not the scale of the credit score expands.
Conclusion
Enlargement of the EITC – and specifically the childless employee profit – is one coverage that would encourage older people to work longer. The outcomes right here recommend that increasing the EITC would doubtless have a statistically important influence on some older people’ employment. However, that influence is most definitely to happen for older single girls – who characterize simply 20 % of these ages 55-64 – and at a charge simply one-third that of comparable, youthful people. Whereas this evaluation is predicated totally on expansions to these with kids, it supplies a number of the first proof that older staff could also be much less attentive to the EITC than their youthful counterparts.
That stated, it’s clear from this evaluation and others prefer it that EITC enlargement has a substantial impact on the labor provide of youthful staff and with a optimistic facet impact: at the least some older staff are more likely to enter the labor power. These optimistic results on employment, which scale back poverty and dependence on different authorities packages, could also be purpose sufficient to assist an enlargement of the coverage.
References
Alpert, Abby and David Powell. 2014. “Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes?” Working Paper WR-987. Santa Monica, CA: The RAND Company.
Bastian, Jacob E. 2020. “The Rise of Working Mothers and the 1975 Earned Income Tax Credit.” American Financial Journal: Financial Coverage 12(3): 44-75.
Bastian, Jacob E. and Maggie R. Jones. 2021. “Do EITC Expansions Pay for Themselves? Effects on Tax Revenues and Government Transfers.” Journal of Public Economics 196: 104355.
Breunig, Robert V. and Andrew Carter. 2018. “Do Earned Income Tax Credits for Older Workers Prolong Labor Market Participation and Boost Earned Income? Evidence from Australia’s Mature Age Worker Tax Offset.” Working Paper 2018-15. Canberra, AU: Tax and Switch Coverage Institute.
Congressional Analysis Service. 2018. “The Earned Income Tax Credit (EITC): A Brief Legislative History.” CRS Report R44825. Washington, DC.
Crandall-Hollick, Margot, Nikhita Airi, and Richard C. Auxier. 2024. “How the American Rescue Plan’s Temporary EITC Expansion Impacted Workers Without Children.” Tax Coverage Middle Temporary. Washington, DC: City Institute and Brookings Establishment.
Eissa, Nada and Hilary Williamson Hoynes. 2004. “Taxes and the Labor Market Participation of Married Couples: the Earned Income Tax Credit.” Journal of Public Economics 88(9-10): 1931-1958.
Flood, Sarah, Miriam King, Renae Rodgers, Steven Ruggles, J. Robert Warren, Daniel Backman, Annie Chen, Grace Cooper, Stephanie Richards, Megan Schouweiler, and Michael Westberry. 2024. IPUMS CPS: Version 12.0 [dataset]. Minneapolis, MN: IPUMS.
Laun, Lisa. 2017. “The Effect of Age-targeted Tax Credits on Labor Force Participation of Older Workers.” Journal of Public Economics 152: 102-118.
Maag, Elaine. 2018. “Tax Reform 2.0 Should Expand Childless EITC to Reduce Poverty.” Tax Coverage Middle TaxVox. Washington, DC: City Institute and Brookings Establishment.
Meyer, Bruce D. and Dan T. Rosenbaum. 2001. “Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers.” Quarterly Journal of Economics 116(3): 1063-1114.
Moulton, Jeremy G., Alexandra Graddy-Reed, and Lauren Lanahan. 2016. “Beyond the EITC: The Effect of Reducing the Earned Income Tax Credit on Labor Force Participation.” Nationwide Tax Journal 69(2): 261-284.
Munnell, Alicia H. 2018. “Want People to Keep Working Longer? Expand the Earned Income Tax Credit.” (November 14). New York, NY: MarketWatch.
Tax Coverage Middle. 2024. “EITC Parameters.” Statistics. Washington, DC: City Institute and Brookings Establishment.
Yin, Yimeng, Anqi Chen, and Alicia H. Munnell. 2024. “The National Retirement Risk Index: An Update from the 2022 SCF.” Situation in Temporary 24-5. Chestnut Hill, MA: Middle for Retirement Analysis at Boston Faculty.
Appendix
