Professor of Economics Ellen Magenheim invited Nada Eissa to speak at Swat about the Earned Income Tax Credit (EITC) welfare program. She gave her lecture, entitled “The End of Welfare As We Know It? Tax-Transfer Policy and Skill Formation,” on September 17 to a full Science Center 101.
“I thought Swarthmore students would be interested in her analytical approach, the topic that she is studying, and how her experiences in academia, government, and other settings inform her work,” said Professor Magenheim.
Nada Eissa is a distinguished economist specializing in tax policy and labor supply. Her lecture, therefore, focused on the mechanics of EITC and its effects on labor supply. Currently, Eissa is an Associate Professor of Public Policy and Economics at Georgetown University.
Eissa began her lecture with a history of social welfare in the United States, recalling the New Deal, Nixon’s Negative Income Tax, and mentioning Medicaid and Aid for Families with Dependent Children. She said that EITC was initiated in 1986 to promote the values of family and work and address one of the enduring criticisms of welfare, that people would become too dependent on financial aid.
She then introduced EITC and gave many details on its expansion since the mid-eighties, its justification, eligible population, how it works, its effects, and its main successes and concerns.
EITC is the largest federal program for low-income families today. It offers tax credit for low-income families with children under the age of nineteen. It offsets federal income tax liability and is targeted specifically for the working poor. Credit amounts depend on family earnings and number of children. The main strength of EITC is that it provides an effective incentive to its potential recipients to join the labor force because it mostly operates on the philosophy “The more you work and the more you earn, the more you get.”
EITC is distributed according to three income categories. Those eligible with the lowest earnings are in the first stage, the “phase in.” These people get a flat percentage of their earned income, which provides people with a strong incentive to work more hours. The second stage is the “flat region.” These people receive maximum credit. The third stage is the “phase out,” where credit is gradually withdrawn at a flat rate.
Eissa indicated that the EITC expansions have led to greater labor force participation in general, especially in single mothers with children. Stronger impacts of the program have been found in women with lower wages, lower education levels, and more children. EITC accounts for up to 60% of the increase in employment rates of single mothers between 1984 and 1996.
Eissa pointed outlined three main ways in which EITC has succeeded. First, EITC has a high participation rate compared to other social welfare programs. 80-86% of the eligible population receives EITC as opposed to the 60-65% that receive traditional welfare. Additionally, EITC unambiguously increases labor-force participation and reduces poverty. Finally, EITC has low administrative costs.
She also pointed out three main concerns: a high non-compliance rate (a third of the current recipients might not be eligible for the amount they are receiving), a record as less effective than traditional welfare programs for those at a very low earning capacity, and high marginal tax rates for people in certain income ranges.
On a final note before the brief question-answer period, Eissa mentioned, “This program allows people to get out of poverty in the long run because of the skills they form in the labor market.”