What helps poor children more: increasing the EITC or increasing educational funding?

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*Note: I’m still working through all this research. If I’ve made a mistake, let me know!

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In a previous post, I argued that after a certain expenditure level, call it $15K a child, my guess is that families would be better off with additional funds as cash transfers. So a district that spends $20K a student (D.C, Newark, New York, etc.) would best serve families by spending $15K per student and sending $10K in cash to a two child home.

Here’s  a similar policy question: if taxpayers are willing to spend extra money to help poor children, should they increase the earned income tax credit (giving working low-income parents increased money) or raise educational funding?

Last month, Kevin Carey and Elizabeth Harris wrote a NYT column summarizing the most recent research on increasing education funding. Their conclusion: money probably does increase test scores.

Unfortunately, they did not the review the research on what happens when you give similar amounts of money to families via other transfers, such as the EITC.

The Effects are Within the Same Range

While none of the research is an exact science, research on the EITC (see a summary here) finds that children under the age of 12 see increases of ~.06-.1 SD per $1,000 increase in the EITC (cumulative full schooling impact).

Rothstein finds that low income districts increase their performance by ~.1 SD per $1K increase in funding (cumulative 10 year impact).

And while these rough estimates find a slightly higher impact for education spending, remember that education spending costs twice as much for a two child family.

The EITC estimates are based on $1K per family, while the public spending estimates are based on $1K per child.

Also: families don’t use the EITC every year, so while increasing spending via education expenditures is a constant expense, the EITC is a variable expense that is only used when families are in poverty.

Because of these factors, my hunch is that the ETIC effects are actually higher per $ spent, but for sake of argument, let’s call it a wash.

The EITC is Well Targeted, Education Spending is Not

Assuming equal effects, the reason the EITC is more efficient in that is better targeted: only poor families get the increases.

Most state funding formulas, on the other hand, give increased funding to districts, not individual students.

This means that giving $1K per student in additional funding to low-income districts is spread across all students in the district, not simply low-income students.

Most importantly, it means that low-incomes students in non-low-income districts don’t receive the benefit.

Rothstein notes as much in his study, writing:

Courts and legislatures can evidently force improvements in school quality for students in low-income districts. But there is an important caveat to this conclusion. As we discuss in Section VI, the average low-income student does not live in a particularly low-income district, so is not well targeted by a transfer of resources to the latter. Thus, we find that finance reforms reduced achievement gaps between high- and low-income school districts but did not have detectable effects on resource or achievement gaps between high- and low-income (or white and black) students. Attacking these gaps via school finance policies would require changing the allocation of resources within school districts, something that was not attempted by the reforms that we study.

Unless States Change Their Funding Formulas, Transfers > Increased Spending

In summary: transfers are targeted at all poor families in a jurisdiction, while education funding increases are generally only targeted at poor families living in low-income districts.

Assuming the research holds on both transfers and education spending – and we continue to see similar effects – then transfers seem to be the much better option, as they reach low-income families in all jurisdictions.

More Research Needed

I view the question of wage subsidies vs. universal basic income vs. increased public services to be one of the most important policy topics out there.

Hopefully we can learn more about the cost / benefits with further research.

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