The history and theory behind the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is the country's largest anti-poverty program. In 2018, over 20 million filers received $63 billion in EITC refunds. Because of its bipartisan popularity and its secure position in the tax code, with no distinct administrative unit managing its payouts, it is also at the center of several substantial anti-poverty programs recently floated in the House and Senate. These proposals variously expand and modify the EITC, often in concert with the Child Tax Credit, in order to offer a more robust benefit.
A look into the history of the EITC reveals that, at its formation, the credit was an unlikely candidate for a major anti-poverty vehicle. In a CONGRESSIONAL RESEARCH SERVICE paper, MARGOT KRANDLE HOLLICK lays out its legislative history, showing that its 1972 introduction by Senator Russell Long was an intervention against proposed guaranteed income programs, and that "the bill had originally included a provision that would have required states to reduce cash welfare by an amount equal to the aggregate EITC benefits received by their residents." From the paper:
"The origins of the EITC can be found in the debate in the late 1960s and 1970s over how to reform welfare—known at the time as Aid to Families with Dependent Children (AFDC). Some policymakers were interested in alternatives to cash welfare for the poor. Some welfare reform proposals relied on the 'negative income tax' (NIT) concept. The NIT proposals would have provided a guaranteed income to families who had no earnings (the 'income guarantee' that was part of these proposals). For families with earnings, the NIT would have been gradually reduced as earnings increased. Influenced by the idea of a NIT, President Nixon proposed in 1971 the 'family assistance plan' (FAP) that 'would have helped working-poor families with children by means of a federal minimum cash guarantee.'
Senator Russell Long, then chairman of the Senate Finance Committee, did not support FAP because it provided 'its largest benefits to those without earnings' and would, in his opinion, discourage people from working. Instead, Senator Long proposed a 'work bonus' plan that would supplement the wages of poor workers. Senator Long stated that his proposed 'work bonus plan' was 'a dignified way' to help poor Americans 'whereby the more he [or she] works the more he [or she] gets.'"
Link to that paper.
- A 1999 Brookings paper by historian Dennis Ventry also examines the unique political history of the EITC, writing that its emergence appealed to legislators as "both an anti-poverty and an anti-welfare program." Link.
- Brian Steensland's excellent book The Failed Welfare Revolution: America's Struggle Over Guaranteed Income Policy surveys this history in depth. Link. And link to a 2006 paper that preceded its publication, on cultures of "worth" and anti-poverty programs.
- A 2015 Duke Law Review Note titled "Earned Income Tax Credit: Path Dependence and the Blessing of Undertheorization," examines "the credit’s path-dependent past, which has resulted in a present-day EITC that manifests a diverse, uncoordinated assortment of policy purposes." Link.
- The above-linked recent proposals have focused on expanding the program's breadth, but retain in some form the "phase-in" structure originally proposed by Long, which excludes non-waged workers from claiming the return. Link to a (previously shared) critique of this structure—and work-tied benefits more broadly—by Matt Bruenig. Link to an also previously shared paper by JFI Fellow Max Kasy, which proposes expanding the EITC into a universal benefit.
- Our colleagues at the Economic Security Project have developed a proposed "Cost of Living Refund," which tackles several important issues with the EITC. It includes proposals for monthly disbursements and expanding eligibility to un-waged care work. Link to the project's website, which hosts research and model legislation.
New Researchers: CENTRAL CIRCULATION
Central banking and local economics
In her job market paper, co-authored with Chenzi Xu, Harvard Economics PhD candidate He Yang considers how the development of a central banking system shaped local economies in the United States. Prior to the National Banking Act of 1864, privately issued bank notes were the predominant currency in circulation. The act mandated that newly formed national banks guarantee bank note liabilities with federal bonds at a rate proportional to local town populations. Xu and Yang exploit this "natural experiment" to observe changes in production and growth:
From the paper:
"The initial significant growth in the manufacturing sector as well as increased trade and innovation could contribute to the persistently higher level of manufacturing production for at least two decades. In sum, our results suggest that the newly entered national banks facilitated local economic development by providing safe liabilities with stable value across places and over time."
Link to the paper.
Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you'd like to see shared here? Send it our way: email@example.com.
- A new article by Teresa Molina Millán, Tania Barham, Karen Macours, John A Maluccio, and Marco Stampini reviews all existing evidence on the consequences of long term conditional cash transfers: "Most studies find positive long-term effects on schooling, but fewer find positive impacts on cognitive skills, learning, or socio-emotional skills. Impacts on employment and earnings are mixed, possibly because former beneficiaries were often still too young. A number of studies find estimates that are not statistically different from zero, but for which it is often not possible to be confident that this is due to an actual lack of impact rather than to the methodological challenges facing all long-term evaluations." Link. ht Sidhya
- Research by Łukasz Kidziński Kinga and Kita-Wojciechowska uses data collected from Google Street View to predict a person's likelihood of getting into a car accident. Insurance companies have already begun to use this data to personalize the cost of premiums. Link.
- From the University of Leeds, a policy brief on effective models for building affordable, low-carbon, climate resilient housing. The brief gleans lessons from the government of Kerala, whose community-based committees oversaw the construction of 23,577 houses, with 100% occupancy rate, at the lowest possible per unit cost: "Involving urban residents in planning, designing and building has ensured that the houses are culturally appropriate; easy to build; inexpensive to live in; and located close to jobs, services and amenities." Link. ht Jack B
- "Declining Job Quality in the United States: Explanations and Evidence" by David R. Howell and Arne L. Kalleberg at the Washington Center for Equitable Growth. Link.
- Two weeks ago, the UK Labour party announced it would launch a UBI pilot if elected. A new report by Guy Standing addresses the primary arguments against basic income, confronts concerns over the value of pilot findings, and presents a series of recommendations for pilot design in the UK. Link.
- "For decades, roughly 55–65% of people who were starting new work came from outside of the labor force; today, that number is approaching 75%. That’s telling us three out of four people who are just starting to work again weren’t counted as unemployed before." Mark Paul squares stagnating real wages with low unemployment. Link.
- Leonardo Baccini, Giammario Impullitti, and Edmund J. Malesky consider the effects of globalization on economies driven by state-owned enterprises (SOEs) like Vietnam and China. They find that unlike private companies, SOEs are unlikely to experience productivity gains as a result of market integration through institutions like the WTO. Link to their paper, and link to an article summarizing their results.
- In a new NBER working paper, Omar Al-Ubaydli, John A. List, and Dana Suskind reflect on the "blind faith" of associating experimental findings with fully scaled policies: "Our work represents a challenge to empiricists to estimate the nature and extent of how important the various threats to scalability are in practice, and to implement those in their original research." Link. (Ungated here.) ht Sidhya
- "American jurisprudence considers price predation a largely irrational, and therefore self-limiting, business strategy which is unlikely to lead to monopolization of an industry. This paper argues that the recent rise of the negative cash flow firm upends traditional assumptions." A new paper by Shaoul Sussman examines the consequences of long-term below average variable cost prices used by companies like Amazon. Link.
- "By analyzing a rich dataset, including historical railway maps, information on passenger and freight traffic, census data and archival information on social movement membership in Sweden, I demonstrate the impact of railway access on the spread and growth of activist organizations. Well-connected towns and cities were more likely to host at least one social movement organization, and to see more rapid growth in membership numbers. The positive impact of rail is only as a result of increased passenger flows to a town or city—it was the mobility of individuals that spread new ideas, not an acceleration of economic activity more broadly." From Eric Melander. Link.