Abstract
•The EITC increases the labor supply of mothers, which leads to increases in payroll and sales taxes paid.•The EITC decreases dependence on government transfer spending.•Evaluated over a one-year period, the net EITC cost is only 17 percent of the $70 billion annual budgetary cost.•Evaluated over a longer-time horizon, the net EITC cost is lower and perhaps zero.•The 2009 EITC expansion continued to increase maternal labor supply and earnings.
This paper calculates the EITC’s net cost by estimating effects, both direct and through recipients’ behavioral changes, on tax revenue and government transfer spending. We show that the EITC increases labor supply and income, thereby increasing the taxes households pay and reducing the government transfer payments they receive. Using linked IRS–CPS data and several EITC policy changes, and focusing on married and unmarried women, we find that the EITC’s net cost is only 17 percent of the ($70 billion) budgetary cost over a one-year period. Although the EITC is one of the U.S.’s largest and most important public assistance programs, the EITC is actually one of the U.S.’s least expensive anti-poverty programs.