Taxes, Welfare, and Work by Single Mothers

Bruce D. Meyer (*) Between 1984 and 1996, changes in tax and transfer programs sharply increased the incentives for single mothers to work. Two aspects of these policy changes are often overlooked. First, many important policy changes occurred even before the implementation of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). Second, despite the media's emphasis on welfare cuts, workfare, and time limits, many of the post-1984 policy changes have encouraged work by increasing financial rewards for working mothers, not by cutting their benefits. These policy changes have included large expansions of the Earned Income Tax Credit (EITC) and Medicaid for families with working mothers, reductions in the implicit tax rates of Aid to Families with Dependent Children (AFDC), and new childcare programs. During this same period, single mothers began to work more; their weekly employment increased by about 6 percentage points and their annual employment increased by nearly 9 percentage points. Other gr oups--for example, single women without children married mothers, and black men--did not experience similar gains in employment during this period. In recent work, Dan T. Rosenbaum and I document the changes in programs and incentives directed toward single mothers, and we examine the effect of these changes on the employment of these women. (1) We show that a large share of the increase in single mothers' work through 1996 can be attributed to the EITC and other tax changes, with smaller shares attributable to cuts in welfare benefits, welfare waivers, training, and child care programs. The 1984-96 period provides a rich laboratory for studying the effects of tax and welfare programs on the decision to work. The magnitudes of these effects are critical determinants of the gains or losses that result from changes in income redistribution and social insurance policies. Moreover, the increase in states' discretion under PRWORA and certain political changes have led to welfare reform that both discourages receipt of welfare benefits and diverts potential welfare recipients from traditional programs. These reforms are difficult, if not impossible, to characterize using a few variables. And it is likely that many of the policies examined in this paper will be even more difficult to analyze using post-PRWORA data. (2) We study three types of changes in single mothers' rewards for work. First, there were very large increases in the EITC between 1984 and 1996, primarily benefiting working mothers with children. During this period, real dollars received through the EITC increased more than tenfold: in 1984, the average single mother who earned $10,000 paid about $300 in income and payroll taxes; by 1996, that same average single mother received a $2,000 subsidy for working. Most of the shift from taxes to subsidies has been attributable to the EITC. During the same period, the taxes paid by single women without children rose slightly. Figure 1 plots the difference in aftertax earnings of single women with two children and those with no children for a range of real pretax earnings in 1984, 1988, 1992, and 1996. We focus on these two types of women because this comparison is used in much of our data analysis. Between 1984 and 1988, single mothers of two whose real annual earnings ranged from $10,000 to $20,000 experienced increases of $500 to $1,500 in aftertax earnings (relative to single women without children). Yet these EITC expansions were smaller than the 1994-6 expansions, particularly for very low-income women with two or more children. For example, for women who earned $7,500, the aftertax earnings difference increased only about $600 between 1984 and 1993; but between 1993 and 1996, their aftertax earnings difference rose more than $1,500. We calculate summary measures of the changes in work incentives by combining the changes in taxes and benefits and averaging them over an (unchanging) earnings distribution of single women, We find that the average annual tax payments by working single mothers fell by $1,442 between 1984 and 1996, and those of single women with no children rose by $187. …