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BRUCE D. MEYER AND DAN T. ROSENBAUM - page 11 / 52

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THE LABOR SUPPLY OF SINGLE MOTHERS

1073

from the IRS for the credit amount. With additional earnings up to $11,610, the credit amount did not change. Additional earnings beyond $11,610 and up to $28,495 (the phase-out range) resulted in a reduction in the credit by 21.06 percent of the additional earnings, until the credit was reduced to zero. This credit sched- ule meant that a woman with two children earning between $5000 and just under $19,000 received at least a $2000 credit.

The current EITC is the result of several legislative changes (summarized in Figure I) which greatly expanded the EITC after 1984. Between its beginning in 1975 and the passage of the Tax Reform Act of 1986 (TRA86), the EITC was small, and the credit amounts did not keep up with ination. Beginning with the TRA86, the EITC was expanded in a number of dimensions. First, credit rates, phase-in ranges and phase-out ranges were in- creased considerably. Second, in 1991 the credit was expanded to provide a larger credit for families with two or more children. The increment to the maximum credit for a second child was small through 1993, but beginning in 1994 the difference began to rise sharply; it rose to $490 in 1994, $1016 in 1995, and $1404 in 1996. Third, in 1991 the requirements for qualifying children were changed in a way that tended to increase eligibility. 12

The after-tax incomes of single women were affected by other changes in federal income taxes during this period, such as the 1987 increase in the personal exemption and the 1988 increase in the standard deduction for household heads. To illustrate the overall changes in after-tax incomes, we plot in Figure II the difference in after-tax income (earnings minus federal income taxes plus the EITC) between a woman with two children and a woman with no children for various pretax earnings levels in 1984, 1988, 1992, and 1996. 13

Figure II illustrates several important aspects of the EITC expansions. First, between 1984 and 1988, single mothers of two with earnings between $10,000 and $20,000 experienced in- creases in take-home pay (relative to single women without chil-

12. There were other small program changes. From 1991 through 1993 there were small refundable credits for child health insurance premiums and for chil- dren under one. Beginning in January 1991, the EITC was not counted as income in most means-tested programs, increasing its value for very low income women.

13. Changes over time in this difference were almost entirely due to changes in the taxes paid (or credits received) by single mothers as can be seen in panel 1 of Table I. The taxes paid by single women without children hardly changed between 1984 and 1996, especially for earnings levels between $10,000 and $20,000.

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