IDEAS home Printed from https://ideas.repec.org/p/red/sed010/1103.html
   My bibliography  Save this paper

The Earned Income Tax Credit: Insurance Without Disincentives?

Author

Listed:
  • Nicole Simpson

    (Colgate University)

  • Devin Reilly

    (Richmond Fed)

  • Kartik Athreya

    (Richmond Fed)

Abstract

The EITC is now the single most important public insurance program in place in the US. It provides wage-subsidies to households that are sharply dependent on their demographic status, especially the number of children present in the household. In addition to productivity risk, it is the case that early in life, neither future marital status, nor the number of dependents, is known with certainty. Therefore, an important dimension of the EITC to act as insurance against such risk, particularly the state in which one experiences marital separation at any time after generating dependent children. Given the fundamental nature of EITC as a public insurance scheme, there are, however, potential effects on incentives. To avoid "abuse" of the EITC, the program must impose limits on eligibility. Providing insurance requires transfers to those doing badly, but the second necessitates having a "phase-out" range for eligibility. The phase out however means that the marginal reward to work may have to fall, sometimes sharply. We ask the following questions. Who benefits from the EITC, and to what extent are beneficiaries recipients of pure transfers relative to pure insurance? What the temporal distribution of benefits? Lastly, how distortionary is the EITC likely to be? For the latter, an important innovation of our paper is to utilize a key insight from work on dynamic models of labor supply under uninsurable risk, especially that of Floden and Linde (2001), and Pijoan-Mas (2006). These papers strongly suggest that the labor supply for the target population of the EITC will be relatively low. Our study, to our knowledge, is the first to measure the implications of the EITC in a setting capable of accommodating the essential features governing its impact. These are (i) a well-defined dynamic setting in which productivity varies with both age, and with uninsurable shocks (ii) liquidity constraints, and (iii) demographic risk. Preliminary results suggest that the EITC provides substantial insurance to young US households, and does not significantly alter, and hence does significantly distort, labor-leisure choices.

Suggested Citation

  • Nicole Simpson & Devin Reilly & Kartik Athreya, 2010. "The Earned Income Tax Credit: Insurance Without Disincentives?," 2010 Meeting Papers 1103, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1103
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2010/paper_1103.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Timothy M. Smeeding & Katherin Ross Phillips & Michael O'Connor, 2000. "The EITC: Expectation, Knowledge, Use and Economic and Social Mobility," JCPR Working Papers 139, Northwestern University/University of Chicago Joint Center for Poverty Research.
    2. Ventry, Dennis J. Jr., 2000. "The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969-99," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 983-1026, December.
    3. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    4. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-589, August.
    5. Dennis J. Ventry, 2000. "The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969 - 1999," JCPR Working Papers 149, Northwestern University/University of Chicago Joint Center for Poverty Research.
    6. Saul D. Hoffman & Laurence S. Seidman, 2003. "Helping Working Families: The Earned Income Tax Credit," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number hwf, November.
    7. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(2), pages 605-637.
    8. Romich, Jennifer L. & Weisner, Thomas, 2000. "How Families View and Use the EITC: Advance Payment Versus Lump Sum Delivery," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1245-1266, December.
    9. Romich, Jennifer L. & Weisner, Thomas, 2000. "How Families View and Use the EITC: Advance Payment versus Lump Sum Delivery," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1245-66, December.
    10. Tim Dowd & John B. Horowitz, 2011. "Income Mobility and the Earned Income Tax Credit," Public Finance Review, , vol. 39(5), pages 619-652, September.
    11. Ellwood, David T., 2000. "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1063-1106, December.
    12. Smeeding, Timothy M. & Phillips, Katherin Ross & O’Connor, Michael, 2000. "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1187-210, December.
    13. Mammen, Sheila & Lawrence, Frances C. & St. Marie, Peter & Berry, Ann A. & Knight, Suzanne Enzian, 2009. "The Earned Income Tax Credit and Rural Families: Differences between Participants and Non-participants," Working Paper Series 47510, University of Massachusetts, Amherst, Department of Resource Economics.
    14. Sheila Mammen & Frances C. Lawrence & Peter St. Marie & Ann A. Berry & Suzanne Enzian Knight, 2009. "The Earned Income Tax Credit and Rural Families: Differences between Participants and Non-participants," Working Papers 2009-1, University of Massachusetts Amherst, Department of Resource Economics.
    15. Saul D. Hoffman & Laurence S. Seidman, 1990. "The Earned Income Tax Credit," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eitc, November.
    16. Jennifer L. Romich & Thomas Weisner, 2000. "How Families View and Use the EITC: Advanced Payment versus Lump-sum Delivery," JCPR Working Papers 138, Northwestern University/University of Chicago Joint Center for Poverty Research.
    17. David T. Ellwood & Jeffrey B. Liebman, 2001. "The Middle-Class Parent Penalty: Child Benefits in the US Tax Code," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 1-40, National Bureau of Economic Research, Inc.
    18. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
    19. Smeeding, Timothy M. & Phillips, Katherin Ross & O’Connor, Michael, 2000. "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1187-1210, December.
    20. Ventry, Dennis J. Jr., 2000. "The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969-99," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 983-1026, December.
    21. Ellwood, David T., 2000. "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1063-1106, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kartik B. Athreya & Devin Reilly & Nicole B. Simpson, 2010. "Earned income tax credit recipients: income, marginal tax rates, wealth, and credit constraints," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(3Q), pages 229-258.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicole Simpson & Jill Tiefenthaler & Jameson Hyde, 2010. "The Impact of the Earned Income Tax Credit on Economic Well-Being: A Comparison Across Household Types," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 29(6), pages 843-864, December.
    2. Kartik B. Athreya & Devin Reilly & Nicole B. Simpson, 2010. "Earned income tax credit recipients: income, marginal tax rates, wealth, and credit constraints," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(3Q), pages 229-258.
    3. Nada Eissa & Hilary W. Hoynes, 2006. "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 73-110, National Bureau of Economic Research, Inc.
    4. V. Joseph Hotz, 2003. "The Earned Income Tax Credit," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 141-198, National Bureau of Economic Research, Inc.
    5. Nada Eissa & Hilary W. Hoynes, 2006. "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Chapters,in: Tax Policy and the Economy, Volume 20, pages 73-110 National Bureau of Economic Research, Inc.
    6. Leigh Andrew, 2010. "Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-43, May.
    7. Bruce D. Meyer, 2010. "The Effects of the Earned Income Tax Credit and Recent Reforms," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 153-180, National Bureau of Economic Research, Inc.
    8. Elliott Isaac, 2020. "Marriage, Divorce, and Social Safety Net Policy," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1576-1612, April.
    9. H. Shaefer & Xiaoqing Song & Trina Williams Shanks, 2013. "Do single mothers in the United States use the Earned Income Tax Credit to reduce unsecured debt?," Review of Economics of the Household, Springer, vol. 11(4), pages 659-680, December.
    10. Aida Farmand & Owen Davis, 2021. "Who Does the Earned Income Tax Credit Benefit? A Monopsony View," SCEPA working paper series. 2021-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    11. Boyd-Swan, Casey & Herbst, Chris M. & Ifcher, John & Zarghamee, Homa, 2016. "The earned income tax credit, mental health, and happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 18-38.
    12. Simpson, Nicole B., 2013. "Families, Taxes and the Welfare System," IZA Discussion Papers 7369, Institute of Labor Economics (IZA).
    13. Dayanand S. Manoli & Nicholas Turner, 2014. "Nudges and Learning: Evidence from Informational Interventions for Low-Income Taxpayers," NBER Working Papers 20718, National Bureau of Economic Research, Inc.
    14. Jonathan Fisher & Bradley L. Hardy, 2023. "Money matters: consumption variability across the income distribution," Fiscal Studies, John Wiley & Sons, vol. 44(3), pages 275-298, September.
    15. Gunter, Samara, 2013. "State Earned Income Tax Credits and Participation in Regular and Informal Work," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 33-62, March.
    16. William N. Evans & Craig L. Garthwaite, 2014. "Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 258-290, May.
    17. David Neumark & William Wascher, 2011. "Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?," ILR Review, Cornell University, ILR School, vol. 64(4), pages 712-746, July.
    18. Katie Fitzpatrick, 2015. "Does “Banking the Unbanked” Help Families to Save? Evidence from the United Kingdom," Journal of Consumer Affairs, Wiley Blackwell, vol. 49(1), pages 223-249, March.
    19. Karen Z. Kramer & Flávia Cristina Drumond Andrade & Andrew J. Greenlee & Ruby Mendenhall & Dylan Bellisle & Renee Lemons Blanks, 2019. "Periodic Earned Income Tax Credit (EITC) Payment, Financial Stress and Wellbeing: A Longitudinal Study," Journal of Family and Economic Issues, Springer, vol. 40(3), pages 511-523, September.
    20. repec:pri:crcwel:wp11-03-ff is not listed on IDEAS
    21. Elliott Isaac, 2018. "Marriage, Divorce, and Tax and Transfer Policy," Working Papers 1810, Tulane University, Department of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed010:1103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.