Tax Cuts and Low-Income Single Mothers

June 29, 2005

From the latest NBER Digest, a new study exploring how four recent tax bills affected the economic well-being of low-income single mothers.

The bottom line? All four bills resulted in net welfare gains to society by providing low-income women with stronger incentives to engage in productive work:

Reducing taxes on low-income single mothers can have an especially favorable effect: some of these women will leave welfare and get paid employment. In Evaluation of Four Tax Reforms in the United States: Labor Supply and Welfare Effects for Single Mothers, coauthors Nada Eissa, Henrik Kleven, and Claus Kreiner look at the tax acts of 1986, 1990, 1993, and 2001 and find that each added to the economic welfare well-being of the nation. Each reform reduced taxes owed by single mothers, thereby shrinking government revenues but also providing an incentive for them to substitute work for welfare payments…

[T]he tax cut of 2001 under the Bush Administration did provide a substantial welfare gain of $1.69 for every tax dollar spent. For all four reforms considered, most of the welfare gains were created by more women going to work, rather than by changes in the number of hours worked by those already working.

Read the full paper here.

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