Taxes, the Earned Income Tax Credit, and Marital Status

A common criticism of tax and welfare policy is that these policies create disincentives for marriage, spurring recent calls for “welfare reform” or eliminating the “marriage penalty” in the federal income tax system. These criticisms are lobbied in the midst of a literature with little conclusive evidence on the effect of these policies on marriage. Changes since the mid-1980s in federal income taxes (especially the Earned Income Tax Credit), welfare (AFDC, TANF, and Food Stamps), Medicaid, and child care provision have dramatically altered the incentives to marry or stay married. It is this laboratory of legislative changes that will be used to test the responsiveness of marriage and divorce rates to changes in incentives, primarily those due to the changes in taxes. I use a method similar to Meyer and Rosenbaum (NBER WP #7363) to carefully characterize the incentives created by the federal income tax system, including the EITC. Using data from the SIPP and March CPS, I examine the responsiveness of marriage and divorce to changes in tax incentives and welfare waivers. My results suggest that it is not possible to rule out large effects of tax incentives on marriage, although the estimated effects are quite sensitive to how incentives are measured and often are not robust across different sub-samples of the data. The results also suggest that entry into marriage is more responsive to tax incentives than is exit from marriage. Welfare waivers appear to have a negligible effect on marriage decisions. Two of the primary contributions of this paper are (1) a better methodology to characterize the changes in incentives induced by policy and (2) more of a focus on transitions into and out of marriage. ACKNOWLEDGEMENTS I thank Jared Bernstein and David Ribar for helpful comments. This paper is the first installment of a larger project entitled “Welfare, the Earned Income Tax Credit, and Family Structure,” which has received generous funding through the Small Grants Program funded by the Census Bureau and administered by the Joint Center for Poverty Research. The author takes full responsibility for all errors and views expressed in this paper. Department of Economics Phone: (336) 334-4872 446 Bryan School Fax: (336) 334-4089 Box 26165 E-mail: [email protected] University of North Carolina at Greensboro Web-site: http://www.uncg.edu/eco/rosenbaum