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Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence

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  • Jesse Rothstein

Abstract

The EITC is intended to encourage work. But EITC-induced increases in labor supply may drive wages down. I simulate the economic incidence of the EITC. In each scenario that I consider, a large portion of low-income single mothers' EITC payments is captured by employers through reduced wages. Workers who are EITC ineligible also see wage declines. By contrast, a traditional Negative Income Tax (NIT) discourages work, and so induces large transfers from employers to their workers. With my preferred parameters, $1 in EITC spending increases after-tax incomes by $0.73, while $1 spent on the NIT yields $1.39. (JEL H22, H23, H24, H31, J22)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 177-208

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:177-208

Note: DOI: 10.1257/pol.2.1.177
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Cited by:
  1. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
  2. Bruno Jacquet & Etienne Lehmann & Bruno Van der Linden, 2011. "Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses," Working Papers 2011-15, Centre de Recherche en Economie et Statistique.
  3. Kolm, Ann-Sofie & Tonin, Mirco, 2013. "In-Work Benefits and the Nordic Model," Research Papers in Economics 2013:1, Stockholm University, Department of Economics.
  4. Lee, David & Saez, Emannuel, 2010. "Optimal Minimum Wage Policy in Competitive Labor Markets," Institute for Research on Labor and Employment, Working Paper Series qt07w2z7t6, Institute of Industrial Relations, UC Berkeley.
  5. Andrew Shephard, 2011. "Equilibrium Search and Tax Credit Reform," Working Papers 1336, Princeton University, Department of Economics, Center for Economic Policy Studies..
  6. Edmark, Karin & Liang, Che-Yuan & Mörk, Eva & Selin, Håkan, 2012. "Evaluation of the Swedish earned income tax credit," Working Paper Series 2012:1, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  7. John Schmitt, 2012. "Low-wage Lessons," CEPR Reports and Issue Briefs 2012-03, Center for Economic and Policy Research (CEPR).
  8. Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 493-533.
  9. Ashok Kaul & Gregor Pfeifer & Stefan Witte, 2012. "The incidence of Cash for Clunkers: an analysis of the 2009 car scrappage scheme in Germany," ECON - Working Papers 068, Department of Economics - University of Zurich.
  10. Edmark, Karin & Liang, Che-Yuan & Mörk, Eva & Selin, Håkan, 2012. "An Evaluation of the Swedish Earned Income Tax Credit," Working Paper Series 901, Research Institute of Industrial Economics.

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