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Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence

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  • Jesse Rothstein

    (Princeton University)

Abstract

The Earned Income Tax Credit (EITC) is intended to encourage work. But EITC-induced increases in labor supply may drive wages down, shifting the intended transfer toward employers. I simulate the economic incidence of the EITC under a range of plausible supply and demand elasticities. In all of the scenarios that I consider, a substantial portion of the intended transfer to low income single mothers is captured by employers through reduced wages. The transfer to employers is borne in part by low skill workers who are not themselves eligible for the EITC and are therefore made strictly worse off by its existence. I contrast the EITC with a traditional Negative Income Tax (NIT). The NIT discourages work, and so induces large transfers from employers of low skill labor to their workers. With my preferred parameters the EITC increases after-tax incomes by $0.73 per dollar spent, while the NIT yields $1.39.

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Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1160.

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Date of creation: Jan 2009
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Handle: RePEc:pri:cepsud:184rothstein

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Keywords: Earned income tax credit; single mothers; labor supply; low skill workers;

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References

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  1. Jeremy Lise & Shannon Seitz & Jeffrey Smith, 2003. "Equilibrium Policy Experiments and the Evaluation of Social Programs," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers, University of Western Ontario, CIBC Centre for Human Capital and Productivity 20032, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  2. Jesse Rothstein, 2008. "The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1049, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Kopczuk, Wojciech & Pop-Eleches, Cristian, 2007. "Electronic filing, tax preparers and participation in the Earned Income Tax Credit," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1351-1367, August.
  4. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, Elsevier, vol. 83(2), pages 173-194, February.
  5. 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 Economics, Australian National University.
  6. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  7. Teulings, Coen N, 1995. "The Wage Distribution in a Model of the Assignment of Skills to Jobs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(2), pages 280-315, April.
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