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Using Differences in Knowledge Across Neighborhoods to Uncover the Impacts of the EITC on Earnings

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  • Raj Chetty
  • John N. Friedman
  • Emmanuel Saez

Abstract

We develop a new method of estimating the impacts of tax policies that uses areas with little knowledge about the policy’s marginal incentives as counterfactuals for behavior in the absence of the policy. We apply this method to characterize the impacts of the Earned Income Tax Credit (EITC) on earnings using administrative tax records covering all EITC-eligible filers from 1996-2009. We begin by developing a proxy for local knowledge about the EITC schedule –the degree of “sharp bunching”at the exact income level that maximizes EITC refunds by individuals who report self-employment income. The degree of self-employed sharp bunching varies significantly across geographical areas in a manner consistent with differences in knowledge. For instance, individuals who move to higher-bunching areas start to report incomes closer to the refund-maximizing level themselves, while those who move to lower-bunching areas do not. Using this proxy for knowledge, we compare W-2 wage earnings distributions across neighborhoods to uncover the impact of the EITC on real earnings. Areas with high self-employed sharp bunching (i.e., high knowledge) exhibit more mass in their W-2 wage earnings distributions around the EITC plateau. Using a quasi-experimental design that accounts for unobservable differences across neighborhoods, we find that changes in EITC incentives triggered by the birth of a child lead to larger wage earnings responses in higher bunching neighborhoods. The increase in EITC refunds comes primarily from intensive-margin increases in earnings in the phase-in region rather than reductions in earnings in the phase-out region. The increase in EITC refunds is commensurate to a phase-in earnings elasticity of 0.21 on average across the U.S. and 0.58 in high-knowledge neighborhoods.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18232.

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Date of creation: Jul 2012
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Publication status: published as Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
Handle: RePEc:nbr:nberwo:18232

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  1. Bises, Bruno, 1990. "Income Tax Perception and Labour Supply in a Sample of Industry Workers," Public Finance = Finances publiques, , vol. 45(1), pages 3-17.
  2. Raj Chetty, 2009. "Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," NBER Working Papers 15616, National Bureau of Economic Research, Inc.
  3. Kopczuk, Wojciech & Pop-Eleches, Cristian, 2007. "Electronic filing, tax preparers and participation in the Earned Income Tax Credit," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1351-1367, August.
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Cited by:
  1. Doerrenberg, Philipp & Duncan, Denvil, 2012. "Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply," IZA Discussion Papers 6914, Institute for the Study of Labor (IZA).
  2. Marx, Ive & Nolan, Brian & Olivera, Javier, 2014. "The Welfare State and Anti-Poverty Policy in Rich Countries," IZA Discussion Papers 8154, Institute for the Study of Labor (IZA).
  3. Bastani, Spencer & Selin, Håkan, 2011. "Bunching and Non-Bunching at Kink Points of the Swedish Tax schedule," Working Paper Series, Center for Fiscal Studies 2011:12, Uppsala University, Department of Economics.
  4. DeFusco, Anthony & Paciorek, Andrew D., 2014. "The Interest Rate Elasticity of Mortgage Demand: Evidence From Bunching at the Conforming Loan Limit," Finance and Economics Discussion Series 2014-11, Board of Governors of the Federal Reserve System (U.S.).
  5. Philipp Doerrenberg & Andreas Peichl, 2012. "The Impact of Redistributive Policies on Inequality in OECD Countries," Cologne Graduate School Working Paper Series 03-05, Cologne Graduate School in Management, Economics and Social Sciences.
  6. Raj Chetty & John N. Friedman & Soren Leth-Petersen & Torben Nielsen & Tore Olsen, 2012. "Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark," NBER Working Papers 18565, National Bureau of Economic Research, Inc.
  7. Almunia, Miguel & Lopez-Rodriguez, David, 2012. "The efficiency cost of tax enforcement: evidence from a panel of spanish firms," MPRA Paper 44153, University Library of Munich, Germany.
  8. Kolm, Ann-Sofie & Tonin, Mirco, 2012. "In-Work Benefits and the Nordic Model," IZA Discussion Papers 7084, Institute for the Study of Labor (IZA).
  9. Dayanand S. Manoli & Nicholas Turner, 2014. "Cash-on-Hand & College Enrollment: Evidence from Population Tax Data and Policy Nonlinearities," NBER Working Papers 19836, National Bureau of Economic Research, Inc.
  10. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
  11. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.

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