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Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income

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  • Hilary W. Hoynes
  • Ankur J. Patel

Abstract

In this paper, we examine the effect of the EITC on the employment and income of single mothers with children. We provide the first comprehensive estimates of this central safety net policy on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 7.3 percentage point increase in employment and a 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. Event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. By capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.

Suggested Citation

  • Hilary W. Hoynes & Ankur J. Patel, 2015. "Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income," NBER Working Papers 21340, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21340
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    References listed on IDEAS

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    1. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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