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The Earned Income Tax Credit: Targeting the poor but crowding out wealth

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  • Maren Froemel
  • Charles Gottlieb

Abstract

This paper quantifies the individual, aggregate and welfare effects of the US Earned Income Tax Credit (EITC). In particular, we analyze the labour supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labour income and a tax on savings. An increase in EITC generosity raises labour force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population. Crédit d’impôt sur les revenus salariaux: cible les pauvres mais évince la richesse. Dans cet article, nous quantifions les effets individuels, agrégés et de bien‐être d’un programme fiscal américain, le Crédit d’impôt sur les revenus salariaux (Earned Income Tax Credit, EITC). En particulier, nous examinons les incidences d’une générosité accrue des politiques de crédit d’impôt sur l’emploi, l’épargne, les prix et le bien‐être. Nos résultats montrent que l’EITC subventionne l’offre de main‐d’œuvre et taxe l’épargne. La hausse du crédit d’impôt augmente le taux de participation sur le marché du travail, réduit l’épargne dans plusieurs cas et dote d’une assurance les ménages à faible revenu. L’EITC réduit les inégalités salariales, accentue les inégalités de richesse et augmente les primes de la compétence de la main‐d’œuvre. Une augmentation de 10% du crédit d’impôt augmente le bien‐être de 0,31% et bénéficie à la majorité de la population.

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  • Maren Froemel & Charles Gottlieb, 2021. "The Earned Income Tax Credit: Targeting the poor but crowding out wealth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 193-227, February.
  • Handle: RePEc:wly:canjec:v:54:y:2021:i:1:p:193-227
    DOI: 10.1111/caje.12492
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    1. The Earned Income Tax Credit: Targeting the Poor but Crowding Out Wealth
      by Christian Zimmermann in NEP-DGE blog on 2016-10-14 00:17:26

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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