Tax Cuts and Single Mothers

In the July 2005 NBER Digest Online is an interesting article on the effects of tax cuts for single mothers. While the tax cuts reduce government revenues, they also increase the incentive to leave welfare and seek paid employment. The researchers, Nada Eissa, Henrik Kleven, and Claus Kreiner, look at the tax acts of 1986, 1990, 1993, and 2001. The conclusion is that each tax act lowered the tax burden on single mothers and improved their welfare substantially. One of the interesting findings that is new to me is that the research found that while women did leave welfare and look for work in all four cases, the number of hours worked did not change. The digest article suggests that this effect might be due to the fixed costs associated with paid employment (commuting costs, child care costs, and preparing and recovering from work).

Another interesting finding was that the 1986 tax act had the largest impact on single mothers.

Looking at the 1986 tax reform, the tax burden on poor working mothers fell 7.94 percent. But for every tax dollar lost or every extra dollar in EITC payments, the welfare real income gain (dollars added to the pockets of these mothers and thus to the nation’s income) amounted to $9.38. In the later tax episodes, the welfare gain per dollar spent was somewhat smaller, mainly because the 1986 reform had already reduced the inefficiencies substantially. Nonetheless, the tax cut of 2001 under the Bush Administration did provide a substantial welfare gain of $1.69 for every tax dollar spent. For all four reforms considered, most of the welfare gains were created by more women going to work, rather than by changes in the number of hours worked by those already working.

Kind of amusing when one recalls all the rhetoric about how bad these tax cuts were for people at the bottom of the income distribution. Additionally the research has this to say about the current tax burden of single mothers.

By 2004, a worker filing a head-of-household tax return faced a federal income tax schedule with six tax brackets, and rates ranging from 10 to 35 percent. Earnings would be shielded from taxes by the standard deduction ($7,150) and by the personal exemption ($3,100 per person). If the taxpayer had two children, she would pay 10 percent in federal income taxes only on earnings above $16,450. She would face either no state income tax (in Florida or Texas) or as much as a 5 percent state income tax (in Massachusetts or Oregon).

Additionally, the authors note, this taxpayer would have paid payroll taxes for Social Security and Medicare of 7.65 percent on her first dollar of earnings. And, she would be eligible for the EITC. To be eligible, her Adjusted Gross Income (AGI) must fall below some limit ($33,692 if she has more than one child). The size of the credit depends on the amount of earned income and the number of qualifying children. The credit is refundable if the head of household has no federal tax liability.

Twenty years earlier, the authors add, this taxpayer would have faced a very different tax scheme, with a much smaller EITC and 15 income tax brackets – ranging from zero to 50 percent. For female household heads, the changes in the EITC since then have played a central role in improving their income position.

Those evil Republicans…what are they up to passing tax laws that are beneficial to single mothers? Clearly their goal is to undermine the institution of marriage. Yeah, that is how to spin this.

FILED UNDER: Economics and Business, Gender Issues
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Tax Cuts and Single Mothers

    In the July 2005 NBER Digest Online is an interesting article on the effects of tax cuts for single mothers. While the tax cuts reduce government revenues, they also increase the incentive to leave welfare and seek paid employment. The researchers, Nad…