Abstract
During the 1990s, US income transfer and tax policies shifted towards trying to encourage work among low-income families. Optimal tax theory, however, suggests that work subsidies are usually an inefficient way to raise the incomes of poor families unless the work effort of recipients has external benefits and/or tax payer/voters prefer redistributing income to the working poor rather than the idle poor. This paper discusses the conditions under which work subsidies may be economically efficient and assesses empirical evidence that suggests that welfare reform and expansions of the EITC have increased work effort among low income families, but is inconclusive about whether the policy shift has enabled them to advance beyond entry-level jobs or benefited their children.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Acs, G., Coe, N., Watson, K., & Lerman, R. (1998). Does work pay: an analysis of the work incentives under TANF. Assessing the New Federalism Occasional Paper #9. Washington, DC: The Urban Institute.
Acs, G., & Loprest, P. (2004). Leaving welfare: employment and well-being of families that left welfare in the post-entitlement era. Kalamazoo, MI: The W. E. Upjohn Institute for Employment Research.
Acs, G., & Maag, E. (2005). Irreconcilable differences? The conflict between marriage promotion initiatives for cohabitating couples with children and marriage penalties in tax and transfer programs. Washington, DC: The Urban Institute.
Acs, G., & Nelson, S. (2004). Changes in living arrangements during the late 1990s: do welfare policies matter? Journal of Policy Analysis and Management, 23(2), 273–290.
Acs, G., Phillips, K. R., & Nelson, S. (2005). The road not taken? Changes in welfare entry during the 1990s. Social Science Quarterly, 86(SE), 1060–1079.
Atkinson, A. B., & Stiglitz, J. E. (1976). The design of tax structure: direct versus indirect taxation. Journal of Public Economics, 6, 55–75.
Blank, R. (2002). Evaluating welfare reform in the United States. Journal of Economic Literature, 40(December), 1105–1166.
Brooks, J., Hair, E., & Zaslow, M. (2001). Welfare reform’s impact on adolescents: early warning signs. Research Brief, Child Trends, Washington, DC.
Carasso, A., Rohaly, J., & Steuerle, C. E. (2005). A unified children’s tax credit. Urban Institute Research Report.
Cherry, R., & Sawicky, M. B. (2000). Giving tax credit where credit is due. Briefing Paper, Economic Policy Institute, Washington, DC.
Diamond, P. A. (1980). Income taxation with fixed hours of work. Journal of Public Economics, 13, 101–110.
Dickert-Conlin, S., & Houser, S. (2002). EITC and marriage. National Tax Journal, 55(1), 25–39.
Eissa, N., & Hoynes, H. W. (2004). Taxes and the labor market participation of married couples: the earned income tax credit. Journal of Public Economics, 88, 1931–1958.
Eissa, N., & Liebman, J. B. (1996). Labor supply response to the earned income tax credit. Quarterly Journal of Economics, 111(2), 605–637.
Ellwood, D. (2001). The impact of the earned income tax credit and social policy reforms on work, marriage, and living arrangements. In B. Meyer, & D. Holtz-Eakin (Eds.), Making work pay: the earned income tax credit and its impact on America’s families. New York: Russell Sage Foundation.
Ellwood, D., & Liebman, J. B. (2001). The middle class parent penalty: child benefits in the U.S. tax code. In J. Poterba (Ed.), Tax policy and the economy 15. Cambridge, MA: MIT Press.
Gladden, T., & Taber, C. (2000). Wage progression among less skilled workers. In D. Card, & R. M. Blank (Eds.), Work and welfare reform (pp. 160–192). NY: Russell Sage.
Government Accountability Office (2001). Earned income tax credit eligibility and participation. GAO-02-290R, Washington, DC.
Greenberg, M., & Savner, S. (1996). Waivers and the new welfare law: initial approaches in state plans. Washington, DC: Center for Law and Social Policy.
Greenstein, R. (2005). The earned income tax credit: boosting employment, aiding the working poor. Washington, DC: Center on Budget and Policy Priorities, http://www.cbpp.org/7-19-05eic.htm.
Grogger, J. (2003). The effects of time limits, the EITC, and other policy changes on welfare use, work, and income among female-head families. Review of Economics and Statistics, 85(2), 394–408.
Hamilton, G. (2002). Moving people from welfare to work: lessons from the national evaluation of welfare to work strategies. New York, NY: MDRC.
Hoffman, S. D., & Seidman, L. S. (2003). Helping working families: the earned income tax credit. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
Holt, S. (2006). The earned income tax credit at 30: what we know. Research Brief, Metropolitan Policy Center, Washington, DC: The Brookings Institution.
Holtzblatt, J., & Rebelein, R. (2001). Measuring the effect of the earned income tax credit on marriage penalties and bonuses. In B. Meyer, & D. Holtz-Eakin (Eds.), Making work pay: the earned income tax credit and its impact on American families. New York: Russell Sage Foundation.
Hotz, V. J., & Scholz, J. K. (2003). The earned income tax credit. In R. Moffitt (Ed.), Means-tested transfer programs in the United States. Chicago: University of Chicago Press and NBER.
Hotz, V. J., Mullin, C., & Scholz, J. K. (2005). Examining the effect of the earned income tax credit on the labor market participation of families on welfare. Working Paper. Department of Economics, Los Angeles, CA: University of California at Los Angeles.
Internal Revenue Service (2002). Compliance estimates for earned income tax credit claimed on 1999 returns. Washington, DC.
Kaplow, L. (1990). Optimal taxation with costly enforcement and evasion. Journal of Public Economics, 43(2), 221–236.
Kaplow, L. (2006). Optimal income transfers (this issue).
Kaushal, N., & Kaestner, R. (2001). From welfare to work: has welfare reform worked? Journal of Policy Analysis and Management, 20, 699–719.
Keane, M., & Moffitt, R. (1996). A structural model of multiple welfare program participation and labor supply. International Economic Review, 39(3), 553–589.
Loprest, P. (2001). How are families that left welfare doing? A comparison of early and recent welfare leavers. Assessing the New Federalism Policy Brief B-36, Washington, DC: The Urban Institute.
Loprest, P., & Zedlewski, S. (2006). The changing role of welfare in the lives of low-income families with children. Urban Institute Occasional Paper, Forthcoming. Washington, DC: The Urban Institute.
McLanahan, S., & Sandefur, G. (1994). Growing up with a single parent: what hurts, what helps. Cambridge, MA: Harvard University Press.
Meyer, B. D. (2002). Labor supply at the extensive and intensive margins: recent tax and welfare policy and its effects. American Economic Review, 92, 373–379.
Meyer, B. D., & Rosenbaum, D. T. (2001a). Making single mothers work: recent tax and welfare policy and its effects. In B. Meyer, & D. Holtz-Eakin (Eds.), Making work pay: the earned income tax credits and its impact on America’s families. New York: Russell Sage Foundation.
Meyer, B. D., & Rosenbaum, D. T. (2001b). Welfare, the earned income tax credit, and the labor supply of single mothers. The Quarterly Journal of Economics, 116(3), 1063–1114.
Meyer, B. D., & Sullivan, J. X. (2006). Consumption, income, and material well-being after welfare reform. Harris School Working Paper Series, Paper 04.16. Chicago: University of Chicago.
Mirrlees, J. A. (1976). Optimal tax theory. Journal of Public Economics, 6, 327–358.
Moffitt, R. A. (1999). The effects of pre-PRWORA Waivers on welfare caseloads and female earnings, income, and labor force behavior. In S. H. Danziger (Ed.), Economic conditions and welfare reform (pp. 91–118). Kalamazoo, MI: W.E. Upjohn Institute Employment Research.
Murray, C. (1995). Losing ground. NY: Basic Books.
Office of Management and Budget (2006). Budget of the United States government, fiscal year 2007. Analytical Perspectives.
O’Neill, J. E., & Hill, M. A. (2001). Gaining ground? Measuring the impact of welfare reform on welfare and work. Civic Report 17, Center for Civic Innovation. NY: Manhattan Institute.
Primus, W., Rawlings, L., Larin, K., & Porter, K. (1999). The initial impacts of welfare reform on the incomes of single-mother families. Washington, DC: Center on Budget and Policy Priorities.
Rowe, G., & Versteeg, J. (2005). Welfare rules databook: state TANF policies as of July 2003. Washington, DC: The Urban Institute.
Saez, E. (2002). Optimal income transfer programs: intensive versus extensive labor supply responses. Quarterly Journal of Economics, 117, 1039–1073.
Sammartino, F., Toder, E., & Maag, E. (2002). Providing federal assistance for low-income families through the tax system: a primer. Discussion Paper 4, Urban-Brookings Tax Policy Center, Washington, DC.
Schoeni, R. F., & Blank, R. M. (2000). What has welfare reform accomplished? Impacts on welfare participation, employment, income, poverty, and family structure. NBER Working Paper 7627, Cambridge, MA.
Scholz, J. K. (1994). The earned income tax credit: participation, compliance, and anti-poverty effectiveness. National Tax Journal, 47, 63–87.
Slemrod, J. (1990). Optimal taxation and optimal tax systems. Journal of Economic Perspectives, 4, 157–178.
Ventry, D. J. (2001). The collision of tax and welfare policies: the history of the earned income tax credit, 1969–1999. In B. Meyer, & D. Holtz-Eakin (Eds.), Making work pay: the earned income tax credits and its impact on America’s families. New York: Russell Sage Foundation.
Zedlewski, S. R., Giannarelli, L., Morton, J., & Wheaton, L. (2002). Extreme poverty rising, existing government programs could do more. Assessing New Federalism, Series B, No. B-45, Washington, DC: The Urban Institute.
Ziliak, J.P. (2006). Makingwork pay: Changes in effective tax rates and guarantees in U.S. transfer programs, 1983–2002. Journal of Human Resources, Forthcoming.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Acs, G., Toder, E. Should we subsidize work? Welfare reform, the earned income tax credit and optimal transfers. Int Tax Public Finance 14, 327–343 (2007). https://doi.org/10.1007/s10797-006-9010-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10797-006-9010-z