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

  • Raj Chetty
  • John N. Friedman
  • Emmanuel Saez

We estimate the impacts of the Earned Income Tax Credit on labor supply using local variation in knowledge about the EITC schedule. We proxy for EITC knowledge in a Zip code with the fraction of individuals who manipulate reported self-employment income to maximize their EITC refund. This measure varies significantly across areas. We exploit changes in EITC eligibility at the birth of a child to estimate labor supply effects. Individuals in high-knowledge areas change wage earnings sharply to obtain larger EITC refunds relative to those in low-knowledge areas. These responses come primarily from intensive-margin earnings increases in the phase-in region.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 7 (December)
Pages: 2683-2721

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:7:p:2683-2721
Note: DOI: 10.1257/aer.103.7.2683
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  1. 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.
  2. Chetty, Nadarajan, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Scholarly Articles 9748524, Harvard University Department of Economics.
  3. 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.
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