[PEN-L:11531] Re: Child tax credit

[Robert Cherry <RobertC@xxxxxxxxxxxxxxxxx>]

Max,
  YouR response seems to conflate two distinctly different aspects of the
labor supply response:  The welfare versus work decisions of female heads of
households and the labor supply of mothers with working husbands that are in
the phase-out range of the eitc schedule.

    I am focusing solely on the latter group and arguing that for a
substantial portion, it is quite rational under the current system for them
to cutback on their work effort even if it means that the household income
declines from say $20,000 to $16,000.  There actual disposable income will
not decline by $4000 since they will obtain an additional $884 of eitc; they
will save $600 in federal income taxes and $310 in SocSecTax, as well as
hundreds of dollars in commuting-related and childcare-related expenses.
With a quite small net income decline, I would expect many of these mothers
would choose the $16,000 by cutting back their market labor.
   For this group your comment --"The answer that appeals to me is that
people basically would rather be working than on welfare, even if the
financial
benefits are not that great, so they don't care too much about marginal tax
rates" -- is beside the point.  I would expect that the reason why they often
continue to work the same hours is that these mothers are not completely
clear on how large their implicit tax rate is.

   Similarly, my view that we should look positively on this disincentive
aspect of the eitc, has little to do with your judgment that the *aggregate*
effect of the eitc on labor supply may be positive.  It may well be
the case that the positive effect on female-headed households
outweighs the negative effect on mothers with employed husbands.  However,
what if it is found that the eitc does have the substantial negative
impact on the market supply decision of mothers with working husbands.  I
am simply arguing that we should be able to defend this aspect of the
eitc.

Robert Cherry/Brooklyn College
------------------------------------------------------------------------------
PAST POSTING

Cherry said:
>     What is at issue, however, is not simply the impact of the eitc on
> welfare recipients but also the working poor.  As I mentioned in an earlier
> post, with this group the concern is how serious is the work disincentive
> given the high implicit tax rate they face.  The just agreed upon
> provision that families with incomes of at least $18,000 will receive the
> child credit allowance (is it phased in??) will mitigate this somewhat.

Sawicky said:
The implicit marginal rates are indeed extremely high in certain
cases.  On the other hand, a fair amount of research suggests
the marginal rates don't matter that much.  The answer that
appeals to me is that people basically would rather be working
than on welfare, even if the financial benefits are not that great,
so they don't care too much about marginal tax rates.  An exception
is the concern about loss of Medicaid benefits for their children.
One of the few and fairly significant bright spots in the budget deal
is an expanded access to such benefits.

Cherry said:
>    Finally, I too am for the eitc -- who could be against it -- and in
> particular believe that the work disincentive is a GOOD thing.  What is
> wrong with the government modestly subsidizing wives who are only
> able to obtain low-wage employment with choosing to spend less time in the
> labor market so that they can spend more time with their children?

Sawicky said:
I'm for it but (not because) I think it has the opposite effect
(e.g., encouraging work).  I guess this is called 'operational
unity.'