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

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Author Info
Ghazala Azmat
Abstract

Tax credits have been a popular way to alleviate in-work poverty. The assumption is typicallythat the incidence is on the claimant workers. However, economic theory suggests noparticular reason to believe that this should be the case. This paper investigates the incidenceof the Working Families Tax Credit in the UK introduced in 1999, which unlike similar taxcredit policies was paid through the wage packet, increasing the connection between theemployer and worker with regard to the tax credit. Using two stage parametric and nonparametriccensored regression methods we find compelling evidence to suggest that (1) thefirm discriminates by cutting the wage of claimant workers relative to similarly skilled nonclaimantworkers when looking at men and (2) there is a spill-over effect onto the wage ofboth groups for both men and women.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0724.

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Date of creation: May 2006
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Handle: RePEc:cep:cepdps:dp0724

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Related research
Keywords: Wages; Incidence; Tax Credits;

Find related papers by 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 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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  1. Richard Blundell & Alan Duncan & Costas Meghir, 1995. "Estimating labour supply responses using tax reforms," IFS Working Papers W95/07, Institute for Fiscal Studies.
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  2. Mike Brewer & Tom Clark & Matthew Wakefield, 2002. "Five years of social security reforms in the UK," IFS Working Papers W02/12, Institute for Fiscal Studies. [Downloadable!]
  3. James Heckman & Lance Lochner & Ricardo Cossa, 2002. "Learning-By-Doing Vs. On-the-Job Training: Using Variation Induced by the EITC to Distinguish Between Models of Skill Formation," NBER Working Papers 9083, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Bingley, P. & Lanot, G., 1999. "Labour Supply and the Incidence of Income Tax on Wages," Papers 99-01, Centre for Labour Market and Social Research, Danmark-.
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  5. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March. [Downloadable!]
  6. Lydon, Reamonn & Walker, Ian, 2004. "Welfare-to-Work, Wages and Wage Growth," IZA Discussion Papers 1144, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Andrew Leigh, 2005. "Optimal Design of Earned Income Tax Credits: Evidence from a British Natural Experiment," CEPR Discussion Papers 488, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
  8. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
  9. Don Fullerton & Gilbert E. Metcalf, 2002. "Tax Incidence," NBER Working Papers 8829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hilary Hoynes & Richard Blundell, 2001. "Has "In-Work" Benefit Reform Helped the Labour Market?," NBER Working Papers 8546, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Battistin, Erich & Enrico Rettore, 2003. "Another look at the Regression Discontinuity Design," Royal Economic Society Annual Conference 2003 18, Royal Economic Society. [Downloadable!]
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  12. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May. [Downloadable!] (restricted)
  13. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October. [Downloadable!] (restricted)
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  14. Andrew Leigh, 2005. "Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms," CEPR Discussion Papers 494, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
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