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The earned income tax credit: targeting the poor but crowding out wealth

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  • Froemel, Maren

    (Bank of England)

  • Gottlieb, Charles

    (University of St Gallen)

Abstract

This paper quantifies the individual, aggregate and welfare effects of the Earned Income Tax Credit (EITC) in the United States. In particular, we analyse 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.

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  • Froemel, Maren & Gottlieb, Charles, 2021. "The earned income tax credit: targeting the poor but crowding out wealth," Bank of England working papers 903, Bank of England.
    • Handle: RePEc:boe:boeewp:0903
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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

    Keywords

    Heterogeneous agents; redistribution; welfare programs;
    All these keywords.

    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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