Effective Policy for Reducing Poverty and Inequality?

Abstract

We examine the effect of the EITC on the poverty and income of single mothers with children using a quasi-experimental approach that leverages variation in generosity due to policy expansions across tax years and family sizes. We find that the income increasing effects of the EITC are concentrated between 75 and 150 percent of income-to-poverty with little effect at the lowest income levels and at levels of 250 percent of poverty and higher. We use these results to show that by failing to capture the indirect effects of the credit on earnings, static calculations of the antipoverty effects of the EITC may be underestimated by almost 50 percent.