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Behavioral Responses to Taxes:Lessons from the EITC and Labor Supply

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  • Hilary W. Hoynes
  • Nada Elissa

    (Department of Economics, University of California Davis)

Abstract

Twenty-two million families currently receive a total of $34 billion dollars in benefits from the EarnedIncome Tax Credit (EITC). In fact, the EITC is the largest cash transfer program for lower-incomefamilies at the federal level. An unusual feature of the credit is its explicit goal to use the tax system toencourage and support those who choose to work. A large body of work has evaluated the labor supplyeffects the EITC and has generated several important findings regarding the behavioral response to taxes.Perhaps the main lesson learned from the evidence is the confirmation that real responses to taxes areimportant; labor supply does respond to the EITC. The second major lesson is related to the nature of thelabor supply response. A consistent finding is that labor supply responses are concentrated along theextensive (entry) margin, rather than the intensive (hours worked) margin. This distinction hasimportant implications for the design of tax-transfer programs and for the welfare evaluation of taxreforms.

Suggested Citation

  • Hilary W. Hoynes & Nada Elissa, 2005. "Behavioral Responses to Taxes:Lessons from the EITC and Labor Supply," Working Papers 310, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:310
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    References listed on IDEAS

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    More about this item

    Keywords

    labor supply;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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