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Tax Credits, Labor Supply, and Intergenerational Transfers
Friday, Jan. 6, 2023
8:00 AM - 10:00 AM (CST)
Labor and Employment Relations Association
Wayne State University
The EITC and Intergenerational Transfers of Time and Money
The Earned Income Tax Credit (EITC) increases labor supply and material well-being, especially for less-educated unmarried mothers most likely to be eligible for the credit. A substantial literature has found positive effects of the EITC on outcomes for children including increases in education and earnings. Though the EITC increases time spent at work, recent work shows that this increase in time spent working does not crowd out time mothers spend on educational investment activities with children. Emerging evidence suggests that the EITC may have multigenerational impacts; it increases unmarried mothers' reliance on informal care for children from grandparents and reduces the time that these mothers spend engaging in chore help for their parents, yet these multigenerational impacts remain relatively unexplored. This project uses the Health and Retirement Study (HRS) to examine the consequences of the EITC for a broad set of intergenerational transfers of time and money. We use a simulated instrument approach linking reports of the HRS respondent on the state of residence, marital status, and number of children of each of their adult children to measure the average and maximum EITC benefits that these adult children are likely to be eligible for. We use this simulated instrument to generate causal estimates of the effect of the EITC on the financial transfers that older adults give to and receive from their adult children and the exchange of time help across generations including the care that older adults provide to grandchildren and the chore and personal care help that adult children provide to aging parents. This project contributes to our understanding of broader impacts of the EITC on time use, particularly grandchild care and care from adult children to aging parents, and to the literature on whether public transfers crowd out private financial transfers.
Not Just for Kids: Child and Dependent Care Credit Benefits for Elder Care
A growing number of adults in the United States care for a relative with a long-term illness or disability. Family caregivers provide critical support while incurring substantial private costs, including out of pocket expenses. The Child and Dependent Care Credit (CDCC) allows households to receive tax credits for certain expenses associated with the care of a dependent, defined as a child under 13 or a spouse or other dependent who is incapable of self-care. However, very few childless households claim tax benefits that may be used for elder care. In this paper, we examine the value of the CDCC for qualifying households caring for adults. We first describe CDCC eligibility requirements and benefits across the income distribution and by the relationship of the dependent. We show that potential benefits during 2021 are substantially higher for a coresident dependent parent than for a spouse. We then use data from the Health and Retirement Study to document the size of the population most likely affected by tax credits for elder care, finding that, as of 2016, more than 10 percent of individuals aged 50 to 65 had a coresident spouse or parent in need of assistance with activities of daily living. Using median cost-of-care data, we estimate how state and federal CDCC benefits affect post-tax costs of typical qualifying caregiving services, such as home health aides. We show that the different tax treatment of households with coresident parents and spouses in need of help substantially affects post-tax costs of care. This paper demonstrates the potential benefits of the CDCC for families caring for older adults, highlights important heterogeneity in the value of the credit across family types, and lays the groundwork for future investigations into how to design comprehensive tax credits for older adults and their caregivers.
Tax Credits in Rural and Economically Distressed Areas: More Bang Per Buck?
Numerous papers show that Earned Income Tax Credit (EITC) expansions have increased maternal labor supply, but little is known about how this effect differs by metropolitan status. Using various datasets and exploiting several EITC expansions, I find that the EITC consistently had larger positive effects on the labor supply of unmarried mothers in rural and economically distressed areas. Among married mothers, I find small negative effects in suburban and urban areas and small positive effects in rural areas. I also replicate and extend previous EITC research to show that these effects hold for EITC expansions spanning 1975 to the 2010s.
The Effects of the Child Tax Credit on Labor Supply
The Child Tax Credit (CTC) is a major earnings subsidy in the US tax and transfer system, but its effects have received little research attention compared to the Earned Income Tax Credit (EITC). I identify the effects of the CTC on extensive margin labor supply using a difference-in-discontinuities design, exploiting the fact that parents lose eligibility for the credit when a child turns 17 before the end of a tax year. Focusing on the credit's effects among lower-income households in Census surveys and administrative tax data, I find that loss of the credit leads to a fall in parental employment, with elasticities comparable to those found in studies of the EITC. These findings suggest tax credits continue to have substantial labor supply effects for low-income households in the post-welfare reform era.
New York University
H2 - Taxation, Subsidies, and Revenue
H4 - Publicly Provided Goods