State EITCs May Foster Economic Mobility
We have long known that the EITC is one of the most effective ways to reduce poverty in the short run. Now a new study reports that children of state EITC recipients are also more likely to have higher household incomes than their parents when they become adults.
Researchers from Harvard and the University of California have just released a new study, The Economic Impacts of Tax Expenditures: Evidence from Spatial Variation Across the U.S. that looks at whether economic mobility varies by community in the United States, and what factors most correlate with economic mobility. Their study is getting a lot of attention because it shows that where children spend their early years makes a big difference in what they will earn when they are 30—and not just because some communities are poorer than others. Upward mobility rates often differ sharply between areas where average income is similar, like Atlanta and Seattle.
The bottom line: the study finds that tax expenditures, including state EITCs, correlate strongly with economic mobility. The researchers concluded: “Overall, our results suggest that local variation in tax expenditures plays a significant role in explaining variation in intergenerational mobility across the US.” The study particularly looked at state EITCs and found significant positive correlations between state EITC policy and intergenerational mobility.
The study looked at two kinds of economic mobility; a measure of relative mobility that looks at the difference in economic mobility between children of low-income parents and children of high-income parents, and a measure of absolute mobility that looks at what happens to children whose parents made about $30,000 — the target income range for both the EITC and the Child Tax Credit. State EITCs and tax expenditures favoring low-income households in general correlated strongly with increased economic mobility on both measures.
How was this study conducted? Researchers took all children who were born in 1980 or 1981 and were US citizens in 2011, and matched them with returns from their parents when they were children. This means the study looked at millions of families—a pretty good sample size by any measure!