The Earned Income Tax Credit: Helping Families at a Surprisingly Low Cost

Amid growing concerns over stagnant rates of intergenerational mobility, little to no wage growth for low-skilled workers, and declining rates of labor force participation, policymakers are interested in approaches to strengthen incentives to work, increase household income for disadvantaged families, and increase children’s economic opportunity. Among U.S. anti-poverty programs, the Earned Income Tax Credit (EITC) stands out as being effective at increasing employment and improving the material well-being of lower-income families.

The EITC is a refundable tax credit that requires that recipients work and is one of the largest cash assistance programs in the United States. In recent years, the EITC distributed around $70 billion a year to almost 30 million lower-income families and lifted more than 6 million people out of poverty. Households earning between about $14,000 and $24,000 with 3 or more children can receive about $6,500 in federal EITC benefits. Figure 1 shows the relationship between EITC benefits and household earnings for different family types.

Figure 1: Federal EITC Structure, 2017


In addition to the federal EITC, 29 states also have their own EITCs, which generally top-up federal EITC benefits by a fixed fraction. This fraction varies from about 3 to 40 percent and is worth from $220 to $2,800. Together, federal and state EITCs can be worth over $9,000 a year, and the average EITC recipient receives over $2,500 a year. Figure 2 shows which states have an EITC, when they introduced it, and what the annual rate was in each year (as a fraction of the federal EITC).

Figure 2: Evolution of EITC, by State


Research consistently shows that EITC expansions decrease poverty, increase self-sufficiency, and have numerous benefits for lower-income mothers and their children. For mothers, the EITC increases employment (Eissa and Liebman, 1996; Meyer and Rosenbaum, 2001; Bastian, 2018), increases wages (Dahl et al., 2009), improves health (Evans and Garthwaite, 2014), decreases stress and financial insecurity (Mendenhall et al., 2012; Jones and Michelmore, 2016), and decreases poverty (Hoynes and Patel, 2015). For children in lower-income families, the EITC improves health (Hoynes et al., 2015; Averett and Wang, 2015), improves test scores (Chetty et al., 2011; Dahl and Lochner, 2012), and increases educational attainment (Manoli and Turner, 2018).

Most EITC research has been limited to studying short-run effects since, until recently, not enough time had passed to evaluate the major EITC expansions in the 1990s. Bastian and Michelmore (2018) – recently published in the Journal of Labor Economics – is one of the only studies to evaluate the longer-run effects of the EITC.

In this study, we look at individuals born between 1967 and 1995 and analyze the longer-run effects of the EITC on educational attainment and employment outcomes when these children grow up. Our approach uses dozens of changes in federal and state EITC policy – between 1975 and 2013 – and variation in EITC benefits that vary by family size. We find strong evidence that the EITC increases high school graduation, college attendance, college graduation, as well as employment and earnings when children of EITC recipients grow up and are in their mid-20s.

We find that a state or federal EITC expansion that increases the maximum available EITC benefits by $1,000 leads to a 1.3% increase in high school graduation, a 4.2% increase in college graduation, a 1.0% increase in employment, and a 2.2% increase in earnings when these children grow up. When we look at how old children were when the EITC was expanded, we find that the EITC’s long-run benefits are larger for teenagers, compared to younger children.

Importantly, we find that these positive effects are largest for children from the poorest households. Figure 3 shows how an EITC expansion at age 18 affects high school graduation. Looking at children growing up in families earning below $60,000, $40,000, $20,000, and so on, we see that EITC expansions have an increasing effect on high school graduation. This finding shows that the EITC increases economic mobility and diminishes the intergenerational transmission of poverty for millions of Americans.

Figure 3: The EITC Has the Largest Impact on the Poorest Children


Why does the EITC affect the long-run outcomes of children in lower-income households? There are two main reasons: one, the EITC provides thousands of dollars to low-income households; two, since the EITC requires that recipients work, we find that many mothers increase their labor-force participation, which increases household earnings.

Increased earnings plus EITC benefits likely help reduce stress, improve health, and allow families to afford more of what economists call “normal goods.” Normal goods are “things that people buy more of when they get more money” and may include healthy food, medical care, books and educational materials, a reliable vehicle, etc. It is easy to see how increased family resources improve the long-run outcomes for children growing up in poor families.

Bastian and Michelmore (2018) adds to our understanding of the EITC: not only does the EITC raise income and lift families out of poverty, but it also provides hope of upward mobility for children growing up in economically disadvantaged households. We also show that recent state and federal EITC expansions have continued to have positive effects, implying that additional EITC expansions today would further help these families.

Regarding potential EITC expansions today, I have new research with Maggie Jones showing that the EITC “helps pay for itself” and that an expansion today would cost much less than policymakers and researchers previously thought. The reason that the EITC helps pay for itself is because the EITC increases labor supply, which then leads recipients to pay more in taxes, and receive less in public assistance, than they otherwise would have. Our estimates suggest that the EITC has a self-financing rate of 87 percent, so that the EITC’s true cost is only 13 percent of the “sticker price.” This finding means that although the EITC is one of the largest and most important public assistance programs in the U.S., the EITC is actually one of the least expensive anti-poverty programs in the U.S., costing taxpayers about half as much as the school lunch and breakfast programs.

To sum up, state or federal EITC expansions today would continue to help lower-income families and decrease intergenerational inequality at a surprisingly low cost to government and to taxpayers.


Averett, S. and Y. Wang 2015. The Effects of the Earned Income Tax Credit on Children’s Health, Quality of Home Environment, and Non-Cognitive Skills. IZA Working Paper.

Bastian, J. 2018. The Rise of Working Mothers and the 1975 Earned Income Tax Credit.

Bastian, J. and K. Michelmore 2018. The long-term impact of the earned income tax credit on children’s education and employment outcomes. Journal of Labor Economics, 36(4):1127–1163.

Bastian, J. and M. Jones 2018. Do EITC Expansions Pay for Themselves? Effects on Tax Revenue and Public Assistance Spending. University of Chicago Working Paper.

Chetty, R., J. Friedman, and J. Rockoff 2011. New Evidence on the Long-Term Impacts of Tax Credits. IRS Statistics of Income White Paper.

Dahl, G. and L. Lochner 2012. The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit. American Economic Review, 102(5):1927–1956.

Dahl, M., T. DeLeire, and J. Schwabish 2009. Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth. National Tax Journal, 62(2):329–347.

Eissa, N. and J. Liebman 1996. Labor Supply Response to the Earned Income Tax Credit. Quarterly Journal of Economics, 111(2):605–637.

Evans, W. and C. Garthwaite 2014. Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health. American Economic Journal: Economic Policy, 6(2):258–290.

Hoynes, H., D. Miller, and D. Simon 2015. Income, the Earned Income Tax Credit, and Infant Health. American Economic Journal: Economic Policy, 7(1):172–211.

Hoynes, H. and A. Patel 2015. Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income.

Jones, L. and K. Michelmore 2016. Timing is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing? Working Paper.

Manoli, D. and N. Turner 2018. Cash-on-Hand and College Enrollment: Evidence from Population Tax Data and the Earned Income Tax Credit. American Economic Journal: Economic Policy.

Mendenhall, R., K. Edin, S. Crowley, J. Sykes, L. Tach, K. Kriz, and J. R. Kling 2012. The Role of EITC in the Budgets of Low-Income Households. Social Service Review, 86(3):367–400.

Meyer, B. and D. Rosenbaum 2001. Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers. Quarterly Journal of Economics, 116(3):1063–1114.