Response to NAS author comments on

Child Tax Credit paper

Kevin Corinth and Bruce D. Meyer
November 4, 2021

Dear Mr. Kessler,

Thank you for shining a light on the important issue of policies to reduce poverty.
While there are a number of problems with the responses you received below, we should first
note that they focused on elasticities. They did not argue that the NAS had in fact considered the
main ways that replacing the CTC with a child allowance would affect work (and consequently
income and poverty), thus implicitly acknowledging that NAS made a fundamental error. There
are four types of labor supply responses to taxes and transfers that economists emphasize:
income effects on the participation (extensive) and hours (intensive) margins, and substitution
effects on the participation and hours margins. The literature has argued that the most important
one of these four types by far for low-income individuals is the substitution effect on
participation. To see the importance of the substitution effect on participation, look at any of the
Meyer papers on the EITC or Hoynes 2019, p. 190. It is revealing that the NAS response in the
WSJ is not that they did in fact include this labor supply effect, rather it is that we didn’t use the
right elasticities, or that our paper has not yet been peer-reviewed. The fact is that NAS did not
account for the change in the reward to work when eliminating the pre-Biden Child Tax Credit
(CTC) and replacing it with a child allowance. In other words, they failed to recognize there was
any substitution effect whatsoever.
In our paper, we include two of the four types of labor supply responses, but do not include the
reduction in hours in response to the substitution effect (others have emphasized this response
including Winship and Goldin et al.) or the hours response to the income effect. We explain this
decision in the discussion section of the paper. We also note that this omission of the hours effect
leads us to underestimate the reduction in labor supply and overestimate the poverty reduction of
the CTC changes.
For completeness, if you want to see the error in the NAS report, first see p. 430 which indicates
that the policies they are simulating (Child Allowance Policy #1 and #2) would “eliminate the
current Child Tax Credit and Additional Child Tax Credit” as does the BBB plan. They then note
on p. 431 that a child allowance in its simplest form “corresponds to an income effect.” They
next discuss how they model behavioral responses to their proposals and only discuss the income
effect except for a brief mention of the substitution effect from the phase-out (which they choose
to ignore). There is no mention of incorporating the substitution effect from the loss in work
incentives due to eliminating the existing CTC. Later, on pages 584-586 they indicate that they
used as the starting point (the baseline) 2015 tax law in one set of simulations and 2018 tax law

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in a second set. The estimates are very similar in the two sets which could not happen if NAS
were incorporating the loss of work incentives (which were much larger under 2018 law).
The discussion by our critics has glossed over whether the NAS report made a conceptual error,
and instead suggested that their “non-error” might only have a moderate effect. The estimates
that they now point to suggest a decline in employment of 500,000-600,000, three to four times
the NAS report estimate. Thus, they have already ceded much of the ground in this debate. If
NAS had recognized this fundamental issue and applied the same elasticities they used to
simulate an expansion of the Earned Income Tax Credit (EITC), they likely would have found
larger reductions in employment than our 1.5 million estimate (as we explain on page 25 of our
paper). While NAS does not explicitly report an elasticity for their EITC calculations, they use
an effect per $1,000 reward to work that translates into an elasticity of 1.25 for single mothers
(see page 2 of our note that discusses an error in the Hoynes and Patel elasticity calculation).
You rightly noted that the labor supply effect they assume is large—in fact it is larger than what
we assumed.
Before responding to the specific points below, we wanted to provide some important
background that demonstrates the plausibility of our results.
First, the pre-Biden CTC was a strong reward to work. It changed a $15/hour job for a parent
with two kids into a $17/hour job. You can see this in Figure 2 (on page 46) of our paper.
Working 1,000 hours during the year at $15 per hour would provide earnings of $15,000 ($15 x
1000 hours over the year). When adding the approximately $2,000 in CTC benefits, take-home
pay rises to $17,000, increasing the effective wage to $17 per hour over the 1,000 hours worked.
If the parent earned $30,000 ($15 x 2000 hours over the year) the pre-Biden CTC would be about
$4000, again converting the $15/hour job into a $17/hour job. Replacing the pre-Biden CTC with
a child allowance would remove the CTC work reward and change the $17/hour job back into a
$15/hour job.
Second, our estimate that 1.5 million workers would exit the labor force due to an important
change in work incentives should not be surprising in light of recent changes in work
participation. The number of workers is currently down 5 million over the course of the
pandemic. Since some individuals have entered employment over this period, that means more
than 5 million have exited.
We have included below our responses to the specific comments you received from the NAS
authors.

1.Meyer/ Cornith, et al   are taking a single substitution elasticity and

applying it up the entire distribution of earnings,  and so  they are
estimating reductions of working for up to $200,000 of earnings and more. 
There is no cap, in his calculations of people quitting work when given an
extra $1000,-$1600 per child. The problem with Meyer, Corinth et al.., is that
the existing literature is not good enough to give us estimates of either

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 substitution or income effects over different earnings ranges.  They only give
averages.  Which means that you have to look at the data that were used in a
study to see what range of incomes were in the data when those elasticities
were computed.  The income elasticities we used were estimated over the full
U.S. population, not just the poor.  As a point of fact, we don’t think any
employment substitution elasticities for families that high up the income
distribution exist.  But there are income effect studies that provide them. 
That’s why we used the income effects in the NAS report .

This comment has several problems.

 To be clear, we use two different substitution elasticities: 0.75 for single mother EITC
recipients, and 0.25 for all other working parents. The earnings of single mother EITC
recipients are all less than about $50,000 ($47,440 for those with two kids, as seen in
Figure 2 on page 46 of our paper), since this is the maximum income you can have and
still qualify for the EITC.
 Just 2% of all exiting workers in our simulation have earnings above $200,000. These
high earning workers are essentially irrelevant to our calculation. See Figure A8 on page
67 of our paper.
 The NAS authors you contacted still do not understand that our paper emphasizes the
substitution effect that they missed in the report. In our simulations, the vast majority of
parents are not quitting because they get an extra $1,000 to $1,600 per child (that is the
income effect). They are quitting because the policy would eliminate the reward to work
from the pre-Biden CTC which is $2,000 per child for most working parents. The
decrease in the reward to work actually reaches $6,600 for a working parent with two
children making $165,000, as shown in Figure A1 (on page 60) of our paper.
 Our higher elasticity (0.75) applies to only single mothers who receive the EITC, and are
thus necessarily below the income cutoff to be eligible for the EITC. This is a subset of
those considered by the EITC literature, which covers all single mothers, including those
with incomes above EITC cutoffs.
 This is a bit subtle, but one of the advantages of simulating using an elasticity is that it
automatically generates smaller employment effects for workers with higher earnings.
This occurs because an elasticity is applied to (multiplied by) the percent change in the
reward to work, and this percent change will be small when earnings are high since the
CTC is then a small percent of earnings. NAS in their EITC simulations uses an effect
per $1000 of EITC credits rather than per a given percentage increase in the return to
work, so they in fact do not down-weight the employment effect for higher earners.

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 2.The substitution elasticities being used come from the 1990s EITC
expansion and zero and very low-earners. Hence they are extrapolating way
into implausible regions., see more above, and then also see Chetty et al points
below .

Many of the same types of people who entered employment due to the expansion of the EITC
and welfare reform in the 1990s and thus now have earnings (typically about average earnings
for single mothers) are the types of people who would exit employment due to elimination of the
pre-Biden CTC and the return of much more readily available unconditional cash aid than we
had pre-welfare reform. This group is large, since 1-1.5 million more single mothers entered
employment in the 1990s.

3.The paper says that only 72% of his total estimate of 1.5m workers who
quit is from people below $50k earnings.   Assuming that the fraction quitting
work for the CTC among those who are over $50k is, in fact, almost zero, that
knocks his -1.5m reduction in workers down to almost -1m.  So that knocks off
a third.  It knocks off more if you think that those in the $40k-$50k range have
lower elasticities that those at the bottom, in the EITC phase in range, which
they almost surely do.  So we are likely at about 300,000 or so who might not
work because of the CTC—however many of these families are also being
affected by the EITC which has a larger positive effect on work in its phase in
region.

The Congressional Budget Office applies substitution elasticities to workers in all earnings
ranges, ranging from 0.31 for those in the bottom decile to 0.22 for those in the top 4 deciles (see
Table 1 on page 4 of the CBO paper). As noted on page 3 of the CBO paper, these elasticities
capture both the employment participation effect and hours effect.

We think it is reasonable that a very small share of working parents with earnings above $50,000
would exit the labor force due to the proposed CTC changes. But even if we assumed no workers
with earnings above $50,000 would exit due to the reduced reward to work, we would still find
1.1 million workers exiting. We would still find 1.3 million workers exiting if we ignored
workers with earnings above $100,000.

4. The Corinth/Meyer paper has a substitution elasticity for single mothers of .

75, the midpoint of a range.  It’s that high because the top end of the range
comes from some very old studies in the 1980s and 1990s that got elasticities a
little above and below 1.0.  Chetty et al's paper on elasticities

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 [nam02.safelinks.protection.outlook.com] ( attached)  illustrates how the
range of elasticities in the Hotz and Scholz review (which then showed up in
the CBO review that Corinth and Meyer cite) are calculated based on pre tax
income in the denominator - recalculating those elasticities using post tax and
transfer income lowers the elasticities considerably. Chetty et al, attached,
Table 1,  lays out the case well with the range of elasticities in the Hotz and
Scholz EITC review (which was the source of the CBO elasticity range which
Corinth et al use).

This comment further indicates that our critics are straining to complain. Whoever this is
complaining about our elasticity for single mothers cites this 2011 Chetty et al. study which
recommends the use of 0.25 for the participation elasticity for the OVERALL population (see the
conclusions on p. 4 of the paper), which is what we do for those who are not single mother EITC
recipients (the vast majority of people). Also look at our note on elasticities discussed below
which indicates that the elasticity we use for single mother EITC recipients is reasonable given
past estimates and lower than those that our critics have estimated. We are examining changes in
after-tax income so we are using after-tax income elasticities. For the rest of our response, see
response to number 5 below.

5.Newer estimates of the elasticity (Chetty, et al ( attached), Hoynes-Patel

[jhr.uwpress.org], Goldin, Maag, Michelmore, [papers.ssrn.com] are in the .
30-.40 range.   Bruce Meyer’s own work estimates .43.  So knock Bruce’s .75
elasticity down to .40, say.  That knocks his -1m down to about ½ m.  So we’re
already down to an estimate 1/3 the size of his. 

We posted a note on our web page on this exact topic two weeks ago. Here are the key points.

 Literature reviews on elasticities for single mothers in response to the EITC consistently
report an elasticity of around 0.75. For example:
o Nichols and Rothstein (in a 2016 volume edited by NAS committee member
Robert Moffitt) state “consensus estimates of the extensive-margin elasticity [are]
around 0.7 to 1.0” (page 198 of paper).
o Goldin, Maag and Michelmore (2021) state that participation elasticities
“approach 0.70 to 1.00 for single mothers” (page 7 of paper). Note that a revised
version of this paper (which now belatedly recognizes that the incentive to
participate in work changes when the CTC changes) concludes that these
elasticities should be much smaller. We are not sure why their conclusion about
the size of the elasticity has changed over the past few weeks. Despite their low
elasticities, they now estimate that around 500,000 to 600,000 parents would

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 leave the labor force due to the CTC changes. This is almost 4 times as large as
the 149,000 estimate reported by NAS.
 Hoynes and Patel (2018) miscalculated their elasticities. When corrected, their elasticity
for single mothers is around 1.25, much higher than the 0.75 elasticity we use. See page 3
of our note.
 The appropriate elasticity based on Meyer and Rosenbaum (2001), i.e., “Bruce Meyer’s
own work,” is 0.67 (see page 2 of our note). Consistent with this estimate, Nichols and
Rothstein (2016) state that the Meyer and Rosenbaum estimate “implies an extensive-
margin labor supply elasticity around 0.7” (footnote 27 on page 21 of paper). Meyer and
Rosenbaum report in their two papers regression coefficients for two different measures
of work and several different measures of the return to work. A CBO paper does report
the 0.43 elasticity, but to be compatible with our measure of work and earnings, the
appropriate elasticity is 0.67.

6.The implicit assumption is that workers with kids understand all of the
effects of what an extra dollar of earnings will bring at income levels between
$30,000 and $50,000 – the red circled area above . In this case, they know
about the positive effects of the EITC , as well as the CDCTC and the CTC
alone  in  the kinked diagram above. If so, they would find lots of workers
bunching just above the slanted portions of the diagram—and of course there
is no evidence of this for hourly workers.  

We don’t have the figure referred to above.

Bottom line on the CTC substitution effect:  it is easy to make a much stronger
case that Corinth et al,   vastly overestimated the substitution effect.  They
assume people as high up as $150,000 in earned income quit work. This is
absurd on the face of it, of. And all else equal the net effect of the substitution
may be at most about 250,00 fewer workers , plus the income effect of 120,000
workers mentioned above . And so the losses will be under 400,000 from the
CTC alone --less than 1/3 of what they estimate

Even if you assume exactly 0 workers with earnings above $100,000 would exit employment due
to the change in the reward to work, we would still find that over 1.3 million workers would exit
employment. While we stand by our estimates that the policy change would lead a very small
share of working parents with high levels of earnings to exit employment, this is an empirically
unimportant issue.
A long literature has emphasized that for low-income people changes in whether they work at all
due to tax changes has a bigger effect on their overall earnings than changes in their number of

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hours. This is the participation effect v. the hours effect. It is not “what an extra dollar of
earnings will bring” that matters in this situation, but the overall difference in income when you
work compared to when you don’t work.