Funded research

H. Luke Shaefer, University of Michigan
Matt Rutledge, University of Michigan

Complements or Substitutes? The Impact of the Earned Income Tax Credit on Utilization of Cash Assistance and Food Stamps

This study examines the impact of the Earned Income Tax Credit (EITC) on utilization of two major public welfare programs among less-skilled single mothers.  Specifically, we focus on the effects associated with expansions of the tax credit in 1986, 1990, and 1993, on cash assistance and food stamps utilization.  We use the Survey of Income and Program Participation (SIPP) in this pursuit, exploiting the survey’s longitudinal sample, which includes panels that surround the major EITC expansions.  Using these data, we evaluate two competing hypotheses: 1) as is often assumed in the literature, it is possible that less-skilled single mothers maximize their utilization of all social welfare benefits.  Participation in these public welfare programs, however, will not fall by more than is dictated by changes in labor force participation.  In this sense, the EITC may act as a complement to the other programs, because single mothers maximize all their possible benefits to generate the most possible income.  2) Alternatively, we believe that as a result of stigma associated with public welfare programs, single mothers may use some of their EITC as a substitute for other benefits, especially following expansions of the tax credit.  If this is correct, we believe that following EITC expansions, single mothers will decrease their participation in AFDC and food stamps beyond what is dictated by changes in labor force participation associate with the credit.

 

 

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