With Labor Day freshly celebrated and concerns over economic insecurity and inequality rising, there is an understandable demand for new ideas to bolster incomes for working families.
Yet in the search for something novel, we should not overlook the need to expand old ideas where the evidence is already in. One such old idea is the earned income tax credit, or EITC, a refundable tax credit that provides a wage subsidy for poor Americans.
Unfortunately, the EITC got caught up in partisan disputes in the 1990s. Under President Bill Clinton, a doubling of the EITC for 10 million workers with two or more children and the first-ever credit to 4.5 million impoverished workers without children was passed – as part of the 1993 deficit reduction act – without a single Republican vote.
In 1995, the EITC was on the cutting board for the new Republican majority, and the Clinton White House battled Speaker Newt Gingrich to the very last day of the 1997 balanced budget negotiations to ensure that millions of mothers on the EITC would still be eligible to receive the new child tax credit.
Even as the last of those battles were being fought in 1997, the evidence was already strong that the EITC, together with a solid minimum wage, was an effective tool to reward work without causing employers to curb hiring. A decade later it is worth noting how much new evidence since then reinforces the wisdom of further expanding the EITC.
By 1997, it was already estimated that with the 1993 expansion, 4.3 million Americans were being lifted out of poverty. The following year, Harvard University economist Jeffrey Liebman demonstrated that the EITC alone had offset 23 percent of the decline in income that the bottom fifth of income earners experienced from 1976 to 1996.
In 2003, Saul Hoffman and Laurence Seidman of the University of Delaware found that the expanded EITC reduced the poverty rate by 1.5 percentage points from 1995 to 1999. In 2005, Bob Greenstein of the Center on Budget and Policy Priorities estimated that without the EITC, the child poverty rate would be 25 percent higher.
Consider the recent evidence on whether the EITC increases work rates among single mothers. In 1999, a study by Bruce Meyer, then at Northwestern University, and Dan Rosenbaum of the University of North Carolina-Greensboro, found that EITC expansions explained more than 60 percent of the increase in employment among single mothers from 1984 to 1996.
And in 2003, Jeffrey Grogger, then at UCLA, demonstrated that between 1993 and 1999, EITC expansions explained 34 percent of the increase in work among single mothers.
And how about the evidence that the EITC helps move people off welfare rolls? In 1995, a University of Wisconsin study by Stacy Dickert, Scott Houser and John Karl Scholz predicted that the expansion of the EITC would induce more than half a million families to move from cash assistance to work. In 2003, Grogger estimated that the credit was the single measure that contributed most to the decline in the welfare use among female-headed families.
Recent research has even pointed to a new benefit of the EITC – the impact it has in pumping up local economies. Only last year, the Federal Reserve Bank of Atlanta found that the EITC had a multiplier effect of 1.07 in economic development in the Nashville, Tenn., metropolitan area, meaning that over 8 years, the EITC sparked an extra $1.25 billion in consumption and investment.
Just this year, a report by James Spencer of the University of Hawaii estimated poor areas of Los Angeles gained more than 1,700 retail jobs thanks to the EITC expansion of 1993.
The culmination of the evidence supports at least three common-sense steps for EITC expansion:
• One, we could do more to reward work for non-custodial parents and at-risk minority males by tripling the current $400 credit for childless workers.
• Two, by adding a higher credit for families with three or more children – as Wisconsin did with its state EITC almost 20 years ago – we would help prevent million of children from growing up in poverty.
• Three, we could go further in reducing the EITC marriage penalty.
All of these expansions further what President Clinton used to describe as the fundamental belief that in the U.S. no parent working full time should have to raise their children in poverty. •
Gene Sperling, author of “The Pro-Growth Progressive,” was President Bill Clinton’s top economic adviser. He is a senior fellow at the Center for American Progress.
