The Earned Income Tax Credit: Insurance Without Disincentives?
The EITC is now the single most important public insurance program in place in the US. It provides wage-subsidies to households that are sharply dependent on their demographic status, especially the number of children present in the household. In addition to productivity risk, it is the case that early in life, neither future marital status, nor the number of dependents, is known with certainty. Therefore, an important dimension of the EITC to act as insurance against such risk, particularly the state in which one experiences marital separation at any time after generating dependent children. Given the fundamental nature of EITC as a public insurance scheme, there are, however, potential effects on incentives. To avoid "abuse" of the EITC, the program must impose limits on eligibility. Providing insurance requires transfers to those doing badly, but the second necessitates having a "phase-out" range for eligibility. The phase out however means that the marginal reward to work may have to fall, sometimes sharply. We ask the following questions. Who benefits from the EITC, and to what extent are beneficiaries recipients of pure transfers relative to pure insurance? What the temporal distribution of benefits? Lastly, how distortionary is the EITC likely to be? For the latter, an important innovation of our paper is to utilize a key insight from work on dynamic models of labor supply under uninsurable risk, especially that of Floden and Linde (2001), and Pijoan-Mas (2006). These papers strongly suggest that the labor supply for the target population of the EITC will be relatively low. Our study, to our knowledge, is the first to measure the implications of the EITC in a setting capable of accommodating the essential features governing its impact. These are (i) a well-defined dynamic setting in which productivity varies with both age, and with uninsurable shocks (ii) liquidity constraints, and (iii) demographic risk. Preliminary results suggest that the EITC provides substantial insurance to young US households, and does not significantly alter, and hence does significantly distort, labor-leisure choices.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.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.:
- Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
- M. Keane & R. Mofitt, 1995.
"A Structural Model of Multiple Welfare Program Participation and Labor Supply,"
95-4, Brown University, Department of Economics.
- Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
- Michael P. Keane & Robert A. Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
- M. Keane & R. Moffitt, . "A structural model of multiple welfare program participation and labor supply," Institute for Research on Poverty Discussion Papers 1080-96, University of Wisconsin Institute for Research on Poverty.
- David T. Ellwood & Jeffrey B. Liebman, 2000.
"The Middle Class Parent Penalty: Child Benefits in the U.S. Tax Code,"
NBER Working Papers
8031, National Bureau of Economic Research, Inc.
- David T. Ellwood & Jeffrey B. Liebman, 2001. "The Middle-Class Parent Penalty: Child Benefits in the U.S. Tax Code," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 1-40 National Bureau of Economic Research, Inc.
- Smeeding, Timothy M. & Phillips, Katherin Ross & O’Connor, Michael, 2000. "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1187-210, December.
- Timothy M. Smeeding & Katherin Ross Phillips & Michael O'Connor, 2000. "The EITC: Expectation, Knowledge, Use and Economic and Social Mobility," JCPR Working Papers 139, Northwestern University/University of Chicago Joint Center for Poverty Research.
- John B. Horowitz, 2002. "Income Mobility and the Earned Income Tax Credit," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 334-347, July.
- Jon Gruber & Emmanuel Saez, 2000.
"The Elasticity of Taxable Income: Evidence and Implications,"
NBER Working Papers
7512, National Bureau of Economic Research, Inc.
- Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
- Dennis J. Ventry, 2000. "The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969 - 1999," JCPR Working Papers 149, Northwestern University/University of Chicago Joint Center for Poverty Research.
- Nada Eissa & Jeffrey B. Liebman, 1995.
"Labor Supply Response to the Earned Income Tax Credit,"
NBER Working Papers
5158, National Bureau of Economic Research, Inc.
- Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
- Romich, Jennifer L. & Weisner, Thomas, 2000. "How Families View and Use the EITC: Advance Payment versus Lump Sum Delivery," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1245-66, December.
- Ellwood, David T., 2000. "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1063-1106, December.
- Jennifer L. Romich & Thomas Weisner, 2000. "How Families View and Use the EITC: Advanced Payment versus Lump-sum Delivery," JCPR Working Papers 138, Northwestern University/University of Chicago Joint Center for Poverty Research.
When requesting a correction, please mention this item's handle: RePEc:red:sed010:1103. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.