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Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms

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  • Andrew Leigh

Abstract

How are hourly wages affected by the Earned Income Tax Credit? Two strategies are utilized to determine the relationship between the credit and hourly wages. First, I use variation in state EITC supplements, which magnify the effect of the federal EITC. I find that a 10 percent increase in the generosity of the EITC is associated with a 4 percent fall in the wages of high school dropouts and a 2 percent fall in the wages of those with only a high school diploma, while having no effect on the wages of college graduates. Given standard estimates of labor demand, this is consistent with the common finding that the EITC boosts labor supply. Although workers with children receive a more generous tax credit than childless workers, and the effect of the credit on labor force participation is larger for those with children, the hourly wages of both groups are similarly affected by an increase in the overall generosity of the EITC. A second strategy is then implemented, based on the insight that the impact of the EITC on wages is determined by the typical EITC parameters in an employee’s labor market, rather than by the individual’s own EITC eligibility. Constructing a simulated instrument for the EITC parameters in an employee’s labor market, I find that wages respond to variation in the fraction of eligible employees and the average EITC rate, but do not respond systematically to changes in the marginal EITC rate.

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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 494.

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Length: 46 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:auu:dpaper:494

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Keywords: taxation incidence; labor supply; simulated instrument;

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Cited by:
  1. Saez, Emmanuel & Matsaganis, Manos & Tsakloglou, Panos, 2010. "Earnings Determination and Taxes: Evidence from a Cohort-Based Payroll Tax Reform in Greece," Institute for Research on Labor and Employment, Working Paper Series qt5fr6354g, Institute of Industrial Relations, UC Berkeley.
  2. David Neumark & William Wascher, 2011. "Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 64(4), pages 712-746, July.
  3. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
  4. Kolm, Ann-Sofie & Tonin, Mirco, 2013. "In-Work Benefits and the Nordic Model," Research Papers in Economics 2013:1, Stockholm University, Department of Economics.
  5. David Neumark, 2011. "Spurring Job Creation in Response to Severe Recessions: Reconsidering Hiring Credits," NBER Working Papers 16866, National Bureau of Economic Research, Inc.
  6. Bennmarker, Helge & Calmfors, Lars & Larsson Seim, Anna, 2013. "Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden," Working Paper Series 2013:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  7. Katie Fitzpatrick & Jeffrey Thompson, 2009. "The Interaction of Metropolitan Cost-of-living & the Federal Earned Income Tax Credit: One Size Fits All?," Working Papers wp204, Political Economy Research Institute, University of Massachusetts at Amherst.
  8. Fisher, Hayley, 2011. "Marriage penalties, marriage, and cohabitation," Working Papers 2011-12, University of Sydney, School of Economics.
  9. Bauhoff, Sebastian, 2014. "The effect of school district nutrition policies on dietary intake and overweight: A synthetic control approach," Economics & Human Biology, Elsevier, vol. 12(C), pages 45-55.
  10. Andrew Shephard, 2011. "Equilibrium Search and Tax Credit Reform," Working Papers 1336, Princeton University, Department of Economics, Center for Economic Policy Studies..

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