Single Mothers and the Earned Income Tax Credit: Insurance Without Disincentives?

46 Pages Posted: 19 Apr 2014

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Devin Reilly

University of Pennsylvania - Department of Economics

Nicole B. Simpson

Colgate University - Economics Department

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Abstract

The Earned Income Tax Credit (EITC) is the single most important transfer program in place in the United States. An aspect of the EITC that has received little attention thus far is its role as a public insurance program. Yet, the structure of the EITC necessarily protects its primary class of recipients, unskilled single mothers, against major risks they face to both wages and changes in family structure. Our study provides the first quantitative statement about the insurance provided by the EITC. We study a dynamic model of consumption, savings, and labor supply in which households face wage and demographic risk, but have only limited self-insurance capacity. We use the model to compare outcomes under the EITC to the counterfactual in which it is completely eliminated.We find that the EITC provides substantial insurance to unskilled single mothers: The program reduces consumption volatility, as measured by the coefficient of the variation, by 12 percentage points or more, even as it allows these households to save less. Importantly, this insurance provision may not be compromising incentives to work: The model suggests that the EITC increases the labor supply of unskilled single mothers substantially at the extensive margin.

Keywords: taxation and subsidies, labor supply, insurance

JEL Classification: H22, J22, H24

Suggested Citation

Athreya, Kartik and Reilly, Devin and Simpson, Nicole, Single Mothers and the Earned Income Tax Credit: Insurance Without Disincentives?. IZA Discussion Paper No. 8114. Available at SSRN: https://ssrn.com/abstract=2426868

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Devin Reilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Nicole Simpson

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States
315-228-7991 (Phone)

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