Does a Higher Income Have Positive Health Effects? Using the Earned Income Tax Credit to Explore the Income‐Health Gradient

The evidence of a positive correlation between individuals’ socioeconomic status and their health outcome is extensive, with high-income individuals tending to be in better health than low-income persons. This relationship has been observed for a wide range of health measures, including mortality (Backlund, Sorlie, and Johnson 1996; McDonough et al. 1997), chronic conditions (Case, Lubotsky, and Paxson 2002), obesity (Schmeiser 2009), functional limitations (Zimmer and House 2003), and self-reported health status (Deaton and Paxson 1998). Even though the existence of this positive correlation is generally accepted, there is no clear consensus on the direction or the pathway of the relationship. For example, Case, Lubotsky, and Paxson (2002) and Lindahl (2005) suggest that a higher income causes improvements in health outcomes, and Arno and colleagues (2009) present preliminary evidence that income-support programs increase access to health insurance and improve certain health outcomes. Bound (1989), Haveman and colleagues (1995), and Smith (1999, 2004), however, maintain that lower incomes are due to the decline in productivity that results from poor health and disabilities rather than the reverse. Still others, like Fuchs (1982), propose that an outside factor, such as a high discount rate, could lead to poor health and low income, thereby creating the observed correlation. Distinguishing which pathway or pathways drive this relationship is extremely valuable to understanding the costs and benefits of both public health policies and public transfer programs. For example, increasing the number of income-support programs may be warranted if a higher income is demonstrated to have a positive health effect (Arno et al. 2009; Deaton 2002; Herd, Schoeni, and House 2008; Lindahl 2005). One of the primary income-support programs in the United States is the Earned Income Tax Credit (EITC), which provides a tax credit that is calculated as a percentage of a family's labor earnings. Unlike traditional welfare programs targeted at nonworkers, the EITC is available only to low-income individuals with labor earnings, thereby giving them an incentive to work. Accordingly, if hypotheses that income-support programs improve low-income individuals’ health outcomes are correct, we might question the wisdom of proposals to eliminate EITC benefits or other income-support programs, as recommended by the President's Commission on Deficit Reduction (National Commission on Fiscal Responsibility and Reform 2010). Thoroughly exploring the direction of the income-health relationship requires using exogenous variations in either health or income, which should not be affected by reverse causality, and then evaluating the resulting impact of this variation on the other variable. Smith (1999, 2004) did this by using exogenous variations in health from the unanticipated onset of a chronic condition. He determined that health status had a causal impact on working-age adults’ income and wealth. The existence of a causal link in one direction, however, does not preclude the existence of a link in the other direction as well. Several earlier studies have used two approaches to discover whether exogenous variations in income influence health outcomes. The first method uses random variation in income, such as lottery winnings, to compare the health outcomes of individuals receiving the extra income with those of persons not receiving extra income. The second method is an instrumental variable approach that uses policy variations, such as state-level EITC benefits, to separate the change in income that is not affected by health status from the change in income that is affected by health status. Such studies have had mixed findings pertaining to the strength of income shocks’ causal impact on health outcomes. For example, when comparing the health of midsize lottery winners in Sweden with the health of nonwinners, Lindahl (2005) found evidence that health status improves with a positive income shock. Similarly, Balan-Cohen (2009) observed that the mortality rate of elderly people dropped when old age assistance rose. In contrast, in an instrumental variable approach, Schmeiser (2009) used variation in EITC benefits to discover that women's obesity rates rose along with their income. Snyder and Evans (2006) also found that health declined as a result of exogenous increases in income. In particular, lower Social Security benefits owing to the Social Security Notch, which decreased benefits for individuals born between 1917 and 1921, resulted in lower mortality rates. But several researchers have noted that, based on the diminishing marginal returns for health spending, the gradient between income and health should be strongest for low incomes (Rodgers 1979). As a result, Herd, Schoeni, and House (2008) criticized Snyder and Evans's findings, stating that the main effect of the Social Security Notch is greater in the income distribution in which the income-health gradient is weaker. In this article I explore the effects of a variation in income on individuals’ morbidity status by using an instrumental variable (IV) approach. This looks at seventeen years of changes in state and federal Earned Income Tax Credit (EITC) benefits to estimate how increases in income influenced the health of low-income individuals. During the 1990s, state and federal guidelines for EITC benefits changed dramatically, and these changes in benefits led to substantial shifts in the incomes of poor families. As a result, these variations provide a natural experiment for exploring how changes in income influence the health of low-income individuals, since the changes in state and federal EITC benefits should be exogenous to individuals’ health statuses. Using variations in EITC benefits to address the direction of the income-health gradient has three advantages. First, earlier research indicated that the income-health gradient is strongest in the low-income population (Backlund, Sorlie, and Johnson 1996; Herd, Schoeni, and House 2008; McDonough et al. 1997). Therefore, since the EITC is targeted at the low-income population, it can be used to analyze this group of particular relevance to the gradient. Second, because the EITC-eligible population consists of working-age adults, it can better show the impact of an exogenous shift in income on a younger population than did the earlier studies that looked at changing benefits for retirees. Third, because I am examining the morbidity of working-age individuals, I can use the large sample sizes of the March Current Population Survey (March CPS) data and the Survey of Income and Program Participation (SIPP). These two large, nationally representative data sets strengthen the estimates of observed effects over those found using smaller samples. This in turn allows for more precise estimates of the impact of income on morbidity than would otherwise be possible. Of course, studying the EITC is limited in that recent research has found that unlike income from other sources, many people spend their Earned Income Tax Credit on consumer durable goods (Barrow and McGranahan 2000; Goodman-Bacon and McGranahan 2008). This difference in types of spending accordingly may affect my ability to generalize results to other income shocks. Nevertheless, since income from raising the EITC comes through both the direct benefits and the shifts in work effort or wages, this limitation is controlled by the fact that only the direct benefits have been shown to be spent differently from the income from other sources.