Welfare Reform and the Role of Tax Policy

This paper explores the often-neglected relationship between welfare reform and tax policy. It sets forth the objectives that underlie welfare reform, then compares expenditure-based and tax-based policy strategies that states and the federal government are taking. The examination suggests that, although they promote the similar broad goals of self-sufficiency and family formation, tax credits such as the Earned Income Tax Credit (EITC) function differently from expenditure-side programs in several ways, and thus they should not be considered perfect substitutes. Those who formulate and evaluate welfare-reform policies need to better consider how tax policies toward low-income families integrate with their expenditure-side counterparts.