Let's try tax cuts, which may actually be paid for yourself – Retirement Research Center

Positive side effects for elderly families.

Hope spring is eternal. Every time a tax cut is proposed, a promise is made: economic growth will eventually lead to more government revenue, not less. For example, in 2017, we have Treasury Secretary Mnuchin speak out that the Tax Cuts and Jobs Act (TCJA) will “pay the price as growth.” Guess what: According to the nonpartisan tax foundation, this is not the case. TCJA should not feel sad. It added a long list of taxes that failed to deliver, including cuts during the Reagan and George W. Bush administrations (which were largely renewed under Barack Obama). So, I was surprised to find that the evidence of tax cuts could make it seemingly impossible: pay for yourself.

When I did a research on another topic, I found this finding – these policies may encourage low-income individuals to work longer to improve their retirement resources. One that complies with the bill is the Income Income Tax Credit (EITC), which increases the refundable credit and earns before phase-out. EITC is one of the government's largest anti-poverty programs. Its design (no benefit to non-workers) was found to encourage employment. So I started writing a summary of questions for the Retirement Research Center at Boston College (asked in April this year) to understand that expanding EITC to more near-retirees will increase their work.

At present, EITC is almost unable to serve these people. The reason is simple: EITC is much larger for families with children. However, among those age groups between 55 and 64, only 15% still have children who depend on them. Since few workers close to retirement use EITC, few research has focused on how they deal with the expansion of childless benefits. However, this expansion has long enjoyed bipartisan (GASP!) support due to the combination of poverty reduction and job encouragement. During Covid, temporary expansions were even briefly implemented.

To see the responses of older workers, I turned to published works Journal of Public Economics Jacob Bastian and Maggie Jones. They examine how the generous growth of EITC has changed economic outcomes, such as employment for low-income individuals. They found that the likelihood of single women using $1,000 each time EITC increased by 5.1 percentage points. However, they do not specialize in retired workers, for example, if health problems get in the way of work, they may be different.

So to look at the reactions of near-retirees, I adjusted their approach slightly, dividing the sample into workers aged 25-54 and workers aged 55-64. My discoveries are interesting, but hardly destroy the earth. EITC increased by $1,000, a significant impact on single women who are about to retire, increasing their employment by 1.5 percentage points. This number is about one-third of single women aged 25-54. Single men and married individuals after retirement were not significantly affected. It turns out that focusing on young people’s research energy is appropriate – EITC has a greater impact on them and may have positive side effects that encourage some near-retirees to work longer.

However, Bastian and Jones' papers show me some ways. It also shows how tax cuts (the extension of EITC is) pay for themselves. How can such a possible feat be possible in the face of so many failures? First, EITC reduces its reliance on demand-based government programs, as new workers are now making income. Second, these new workers generate some payroll tax revenue. Finally, the authors found that 83% of the EITC expansion cost is ultimately paid for by these effects. The authors also point out that other studies have shown that EITC can improve maternal health, reduce female incarceration and improve long-term outcomes for children. If these effects are considered, the program may pay its own price at all.

Sadly, I haven't heard much talk about the current government yet. But unlike the restart of the TCJA, the TCJA that Congress is currently considering, the expansion of the EITC may achieve a long-standing elusive goal: tax cuts are paid for themselves. It does this when my retired researchers are near the heart and with precious side effects – some people who are about to retire are encouraged to work longer.