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The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK

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  • Ghazala Azmat

Abstract

Tax credits have been a popular way to alleviate in-work poverty. The assumption is typically that the incidence is on the claimant workers. However, economic theory suggests no particular reason to believe that this should be the case. This paper investigates the incidence of the Working Families Tax Credit in the UK introduced in 1999, which unlike similar tax credit policies was paid through the wage packet, increasing the connection between the employer and worker with regard to the tax credit. Using two stage parametric and nonparametric censored regression methods we find compelling evidence to suggest that (1) the firm discriminates by cutting the wage of claimant workers relative to similarly skilled nonclaimant workers when looking at men and (2) there is a spill-over effect onto the wage of both groups for both men and women.

Suggested Citation

  • Ghazala Azmat, 2006. "The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK," CEP Discussion Papers dp0724, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0724
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    1. repec:pri:cepsud:223shephard is not listed on IDEAS
    2. Andrew Shephard, 2017. "Equilibrium Search And Tax Credit Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1047-1088, November.
    3. Andrew Shephard, 2011. "Equilibrium Search and Tax Credit Reform," Working Papers 1336, Princeton University, Department of Economics, Center for Economic Policy Studies..
    4. Austin Nichols & Jesse Rothstein, 2015. "The Earned Income Tax Credit," NBER Chapters, in: Economics of Means-Tested Transfer Programs in the United States, Volume 1, pages 137-218, National Bureau of Economic Research, Inc.
    5. 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.
    6. repec:pri:cepsud:184rothstein is not listed on IDEAS
    7. 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.
    8. 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.
    9. Figari, Francesco, 2011. "From housewives to independent earners: can the tax system help Italian women to work?," ISER Working Paper Series 2011-15, Institute for Social and Economic Research.
    10. Lane Kenworthy, 2015. "Do employment-conditional earnings subsidies work?," ImPRovE Working Papers 15/10, Herman Deleeck Centre for Social Policy, University of Antwerp.
    11. Jesse Rothstein, 2009. "Is the EITC Equivalent to an NIT? Conditional Cash Transfers and Tax Incidence," NBER Working Papers 14966, National Bureau of Economic Research, Inc.
    12. Helge Bennmarker & Lars Calmfors & Anna Seim, 2014. "Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-20, December.

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    More about this item

    Keywords

    Wages; Incidence; Tax Credits;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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