NCPA - National Center for Policy Analysis


October 5, 2005

Reducing taxes on low-income single mothers can have an especially favorable effect: some of these women will leave welfare and get paid employment, according to a new paper from the National Bureau of Economic Research (NBER).

Using data from the March Current Population Survey by the Census Bureau, the authors looked at the tax acts of 1986, 1990, 1993 and 2001 and found that each added to the economic well-being of the nation. Each reform reduced taxes owed by single mothers, thereby shrinking government revenues, but also providing an incentive to substitute work for welfare payments. Overall, between 1985 and 2000, these single mothers' marginal tax rate fell from 57 percent to 32 percent.

Looking at the 1986 tax reform, the authors found:

  • The tax burden on poor working mothers fell 7.94 percent.
  • Because of the lower taxes, they had an additional incentive to work.
  • Consequently, for every tax dollar lost or every extra dollar spent on Earned Income Tax Credit (EITC) payments, poor mothers had a real income gain amounting to $9.38.

Other tax reforms had beneficial effects, say the authors:

  • After the 1993 tax reform, single mothers worked fewer hours per year, but this decline was overwhelmed by a solid increase in low-income mothers going to work.
  • The tax cut of 2001 provided a real income gain of $1.69 for every tax dollar cut.

Source: David R. Francis, "The Work Effects of Tax Cuts on Low-Income Single Mothers," NBER Digest, July 2005; based upon: Nada Eissa, Henrik Kleven, and Claus Kreiner, "Evaluation of Four Tax Reforms in the United States: Labor Supply and Welfare Effects for Single Mothers," National Bureau of Economic Research, Working Paper No. 10935, November 2004.

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