Using Differences in Knowledge Across Neighborhoods to Uncover the Impacts of the EITC on Earnings
We develop a new method of estimating the impacts of tax policies that uses areas with little knowledge about the policy's marginal incentives as counterfactuals for behavior in the absence of the policy. We apply this method to characterize the impacts of the Earned Income Tax Credit (EITC) on earnings using administrative tax records covering all EITC-eligible filers from 1996-2009. We begin by developing a proxy for local knowledge about the EITC schedule -the degree of "sharp bunching"at the exact income level that maximizes EITC refunds by individuals who report self-employment income. The degree of self-employed sharp bunching varies significantly across geographical areas in a manner consistent with differences in knowledge. For instance, individuals who move to higher-bunching areas start to report incomes closer to the refund-maximizing level themselves, while those who move to lower-bunching areas do not. Using this proxy for knowledge, we compare W-2 wage earnings distributions across neighborhoods to uncover the impact of the EITC on real earnings. Areas with high self-employed sharp bunching (i.e., high knowledge) exhibit more mass in their W-2 wage earnings distributions around the EITC plateau. Using a quasi-experimental design that accounts for unobservable differences across neighborhoods, we find that changes in EITC incentives triggered by the birth of a child lead to larger wage earnings responses in higher bunching neighborhoods. The increase in EITC refunds comes primarily from intensive-margin increases in earnings in the phase-in region rather than reductions in earnings in the phase-out region. The increase in EITC refunds is commensurate to a phase-in earnings elasticity of 0.21 on average across the U.S. and 0.58 in high-knowledge neighborhoods.
|Date of creation:||Jul 2012|
|Date of revision:|
|Publication status:||published as Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wojciech Kopczuk & Cristian Pop-Eleches, 2005.
"Electronic Filing, Tax Preparers, and Participation in the Earned Income Tax Credit,"
NBER Working Papers
11768, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Chetty, Nadarajan, 2012.
"Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply,"
9748524, Harvard University Department of Economics.
- Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, 05.
- Raj Chetty, 2009. "Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," NBER Working Papers 15616, National Bureau of Economic Research, Inc.
This item is featured on the following reading lists or Wikipedia pages:
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18232. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.