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The Earned Income Tax Credit and the Labor Supply of Married Couples

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  • Nada Eissa
  • Hilary Williamson Hoynes

Abstract

Over 18 million taxpayers are projected to receive the Earned Income Tax Credit (EITC) in tax year 1997, at a total cost to the federal government of about 25 billion dollars. The EITC is refundable, so that any amount of the credit exceeding the family's tax liability is returned in the form of a cash refund. Advocates of the credit argue that this redistribution occurs with much less distortion to labor supply than that caused by other elements of the welfare system. This popular view that the credit is unlikely to hold among married couples. Theory suggests that primary earners (typically men) would increase labor force participation, but secondary earners would reduce their labor supply in response to an EITC. We study the labor supply response of married couples to several EITC expansions between 1984 and 1996. While our primary interest is the response to changes in the budget set induced by the EITC, our estimation strategy takes account of budget set changes caused by federal tax policy, and by cross-sectional variation in wages, income, and family size. We use both quasi-experimental and reduced form labor supply models to estimate the impact of EITC induced tax changes. The results suggest that EITC expansions between 1984 and 1996 increased married men's labor force participation only slightly but reduced married women's labor force participation by over a full percentage point. Overall, the evidence suggests that family labor supply and pre-tax family earnings fell among married couples. Our results imply that the EITC is effectively subsidizing married mothers to stay at home, and therefore have implications for the design of the program.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6856.

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Date of creation: Dec 1998
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Publication status: published as Eissa, Nada and Hilary Wiliamson Hoynes. "Taxes And The Labor Market Participation Of Married Couples: The Earned Income Tax Credit," Journal of Public Economics, 2004, v88(9-10,Aug), 1931-1958.
Handle: RePEc:nbr:nberwo:6856

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  1. Bruce D. Meyer & Dan T. Rosenbaum, 1999. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," NBER Working Papers 7363, National Bureau of Economic Research, Inc.
  2. Joshua D. Angrist & Guido W. Imbens, 1995. "Identification and Estimation of Local Average Treatment Effects," NBER Technical Working Papers 0118, National Bureau of Economic Research, Inc.
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  7. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
  8. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May.
  9. Holtzblatt, Janet & McCubbin, Janet & Gillette, Robert, 1994. "Promoting Work Through the EITC," National Tax Journal, National Tax Association, vol. 47(3), pages 591-607, September.
  10. Hilary Hoynes, 1993. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation Under AFDC-UP," NBER Working Papers 4407, National Bureau of Economic Research, Inc.
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  12. Dickert-Conlin, Stacy & Houser, Scott, 1998. "Taxes and Transfers: A New Look at the Marriage Penalty," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 175-217, June.
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  15. Saul D. Hoffman & Laurence S. Seidman, 1990. "The Earned Income Tax Credit," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eitc, December.
  16. Blomquist, Soren, 1996. "Estimation methods for male labor supply functions How to take account of nonlinear taxes," Journal of Econometrics, Elsevier, vol. 70(2), pages 383-405, February.
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  19. Flood, Lennart & MaCurdy, Thomas, 1992. "Work disincentive effects of taxes: An empirical analysis of Swedish men," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 37(1), pages 239-277, December.
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