Jacob Bastian and Maggie Jones: Do EITC Expansions Pay for Themselves? Effects on Tax Revenue and Public Assistance Spending

The minimum wage doesn’t do what many people think the minimum wage does. (On what is wrong with the minimum wage, see my “Inequality Is About the Poor, Not About the Rich.”) It is the Earned Income Tax Credit that does what many people think the minimum wage does. Therefore, people who love the minimum wage should love the Earned Income Tax Credit instead—and push for its expansion instead of pushing for a higher minimum wage.

Jacob Bastian and Maggie Jones have done a very interesting analysis of the Earned Income Tax Credit. The title of this post is a link to the pdf file. Here is the abstract:

This paper studies how behavioral responses to the Earned Income Tax Credit (EITC) affect the program's budgetary cost. The EITC encourages labor supply and increases income, thereby reducing public assistance payments to households and increasing taxes paid by households. These sources of revenue reduce the EITC's net cost. We use administrative Internal Revenue Service tax data linked to Current Population Survey data on enrollment in public assistance programs to estimate the EITC's net cost. The evidence from three decades of EITC policy expansions implies that the EITC decreases public assistance received by mothers and increases payroll and sales taxes paid. 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. Although the EITC is one of the largest and most important public assistance programs in the U.S., we show that 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.