Earned Income Tax Credit Versus Temporary Assistance for Needy Families
by This is the conclusion.
These are some of the reasons why the EITC is likely to resolve the work disincentive concern of the TANF. There are several other benefits such as avoiding the scarring effect of unemployment and also the psychological and emotional costs, but this paper focuses on the effect on a country’s output.[1] [2]
This theoretical conclusion is one of the most important selling points of the EITC over the TANF if the U.S. government takes Okun’s Law into consideration when weighing the costs and benefits. In the year 2002, if the removal of the TANF in favor of the EITC results in a 0.8 percent decline in the unemployment rate, it would lead to an increase of 1.6 percent in GDP, or $173 billion in goods and services. The extra $17 billion spent on the EITC in that same year definitely seems worth it. Moreover, if there was no TANF program in 2002, it would have saved the country the $15 billion that was spent on it.
In conclusion, unemployment is conceivably the most serious economic concern in the labor market and removing the TANF in favor of the EITC may be a complicated task but it definitely seems prudent.
[1] Maura Sheehan and Mike Tomlinson, “Unemployment Duration in an Unemployment Blackspot,” Labour 12 (Winter 1998): 643-73, find that employers regard long spells of unemployment as a negative “signal” about a worker’s potential productivity.
[2] One study provides evidence that being unemployed does impact a person’s potential to abuse alcohol. See John Mullahy and Jody Sindelar, “Employment, Unemployment, and Problem Drinking,” Journal of Heath Economics 15 (August 1996): 409-34.
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