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Tax Refunds and Income Manipulation Evidence from the EITC

Author

Listed:
  • Florian Buhlmann

    (Center for European Economic Research (ZEW))

  • Benjamin Elsner

    (University College Dublin, IZA and CReAM)

  • Andreas Peichl

    (ifo Institute, CESifo, University of Munich, ZEW and IZA)

Abstract

Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the US.

Suggested Citation

  • Florian Buhlmann & Benjamin Elsner & Andreas Peichl, 2018. "Tax Refunds and Income Manipulation Evidence from the EITC," Working Papers 201811, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:201811
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    References listed on IDEAS

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    Cited by:

    1. Spencer Bastani & Thomas Giebe & Chizheng Miao, 2019. "Ethnicity and tax filing behavior," CESifo Working Paper Series 7576, CESifo Group Munich.
    2. repec:eee:labeco:v:55:y:2018:i:c:p:98-115 is not listed on IDEAS

    More about this item

    Keywords

    EITC; bunching; income manipulation;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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