Work pays off.

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A Poverty-Buster That's No Liberal Fantasy

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “The World According to Star Wars” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”
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What would you think if a presidential candidate -- Republican or Democrat -- proposed a new federal program claiming to reduce poverty, boost employment, improve the health of infants and mothers, and increase the likelihood that people would graduate from college? You’d probably think the candidate was blowing a lot of smoke.

Yet the earned income tax credit is doing every one of these things. In recent years, a growing body of research has shown that unlike many antipoverty efforts, the EITC is not only achieving its primary goals but also having unexpected secondary benefits. And a new paper, released last month, demonstrates that the news is even better than the program’s advocates thought.

The Safety Net

The operation of the EITC is fairly simple. If you’re in the labor force, but don’t make much money, you get a tax credit at the end of the year. The amount depends on how much you make and how many children you have. In 2014, the maximum for someone with no qualifying children was $496. For someone with three or more qualifying children, the maximum was $6,143.

The original goals of the EITC were simple: reduce poverty while also increasing employment. The credit would provide help to the working poor, and by making work more remunerative, it would also increase people’s incentive to join the labor market. Last month’s research, by Hilary Hoynes, an economist at the University of California at Berkeley, and the Treasury Department’s Ankur Patel, offers the most comprehensive assessment of the credit’s effects on both counts.

Much of the authors’ analysis explores the consequences of Congress’s 1993 decision to increase the credit. Focusing on families led by single women, they find that a $1,000 increase produced major reductions in the poverty rate -- specifically, a 9.4 percentage-point reduction in the share of families below the poverty line.

This finding is consistent with recent claims that the EITC (along with the federal child tax credit) has lifted more than 10 million people out of poverty (including more than 5 million children). The authors say there’s a good possibility the actual numbers are a lot higher than recent projections.

Hoynes and Patel also find that the EITC has significantly boosted employment. A $1,000 increase in the credit translates into a 7.3 percentage-point increase in the employment of single mothers. This means that as a result of the boost in 1993, hundreds of thousands of women have entered the workforce.  

Even better, the bulk of the money is going to people below or near the poverty line. While the credit is available to people whose earnings exceed that level, it was designed to subsidize, and is subsidizing, people who are seriously struggling. (Unfortunately, it isn’t much help to those who are far below the poverty line, but that’s to be expected, because people at the very bottom don’t have much connection to the workforce.)

The EITC has also had a series of secondary benefits. It is associated with reductions in cardiovascular diseases and metabolic disorders among mothers; with significantly reduced levels of premature births and low birth weight; with higher test scores for elementary- and middle-school children; and with increases in the likelihood of college attendance.

As an antipoverty program, the earned income tax credit is far more effective than the minimum wage. Economists continue to dispute whether modest increases in the minimum wage will decrease employment. But if the goal is to boost employment, no one thinks the minimum wage is an especially good idea. The EITC is much better on that count, too.

It should be expanded in three ways. First, the credit is unavailable to childless people under 25. That’s a serious gap. Within this age group, labor-force participation remains low; the EITC would provide valuable economic help and also a spur to find jobs. It should be available to anyone over 21.

Second, the EITC is unacceptably small for people without children and for noncustodial parents. For example, a $496 ceiling in the credit for this group is far too low. It should be tripled.

Third, raising the credit across the board (say, by 8 percent) would pay big social dividends. Such increases would not only provide greater help to working Americans who are really struggling, but also boost employment, improve the health of both children and mothers, and, in the long run, increase educational attainment as well.

Many issues divide reasonable people. The earned income tax credit isn’t one of them. Let’s build on what’s working.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Cass R Sunstein at csunstein1@bloomberg.net

To contact the editor on this story:
Katy Roberts at kroberts29@bloomberg.net