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The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC

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  • Jesse Rothstein

    (Princeton University and NBER)

Abstract

The EITC is designed to encourage work. But EITC-induced increases in labor supply may drive wages down, shifting the intended transfer toward employers and hurting non- EITC low-skill workers. I exploit variation across family types and skill levels to identify the effect of a large EITC expansion in the mid 1990s. Ceteris paribus, low-skill single mothers keep only $0.70 of every dollar they receive. Employers of low-skill labor capture $0.72, $0.30 from single mothers plus $0.43 from ineligible workers whose after-tax incomes fall when the EITC is expanded. The net transfer to low-skill workers is less than $0.28 per dollar spent.

Suggested Citation

  • Jesse Rothstein, 2008. "The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC," Working Papers 1049, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:165
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    Cited by:

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    2. David Neumark & William Wascher, 2011. "Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?," ILR Review, Cornell University, ILR School, vol. 64(4), pages 712-746, July.
    3. Andrew Shephard, 2017. "Equilibrium Search And Tax Credit Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1047-1088, November.
    4. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
    5. 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, May.
    6. Leigh Andrew, 2010. "Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-43, May.
    7. Kenneth A. Couch & Douglas J. Besharov & David Neumark, 2013. "Spurring Job Creation in Response to Severe Recessions: Reconsidering Hiring Credits," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 32(1), pages 142-171, January.
    8. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
    9. Hoynes, Hilary & Rothstein, Jesse, 2016. "Tax Policy Toward Low-Income Families," Department of Economics, Working Paper Series qt87d6v10j, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    10. Breda, Thomas & Haywood, Luke & Wang, Haomin, 2022. "Equilibrium Effects of Payroll Tax Reductions and Optimal Policy Design," IZA Discussion Papers 15810, Institute of Labor Economics (IZA).
    11. Elira Kuka, 2014. "EITC and the Self-employed," Public Finance Review, , vol. 42(6), pages 691-719, November.
    12. Helge Bennmarker & Lars Calmfors & Anna Seim, 2014. "Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-20, December.
    13. Gavrilova, Evelina & Zoutman, Floris T. & Hopland, Arnt O., 2017. "How to Use One Instrument to Identify Two Elasticities," Discussion Papers 2017/2, Norwegian School of Economics, Department of Business and Management Science.
    14. Andrew Shephard, 2017. "Equilibrium Search And Tax Credit Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1047-1088, November.
    15. Justine Hastings & Ebonya Washington, 2010. "The First of the Month Effect: Consumer Behavior and Store Responses," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 142-162, National Bureau of Economic Research, Inc.
    16. Jeannette Wicks-Lim & Jeffrey Thompson, 2010. "Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Living Standard to All U.S. Workers," Published Studies peri_mw_eitc_oct2010, Political Economy Research Institute, University of Massachusetts at Amherst.
    17. Watson, C. Luke, 2021. "the General Equilibrium Incidence of the Earned Income Tax Credit," SocArXiv 8n3ag, Center for Open Science.
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    19. Laun, Lisa, 2019. "In-work benefits across Europe," Working Paper Series 2019:16, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    20. Aida Farmand, 2019. "Impacts of Earned Income Tax Credit on Wages of Ineligible Workers," SCEPA working paper series. 2019-04, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    21. Isabelle Joumard & Mauro Pisu & Debbie Bloch, 2012. "Tackling income inequality: The role of taxes and transfers," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 37-70.
    22. Isabelle Joumard & Mauro Pisu & Debra Bloch, 2012. "Less Income Inequality and More Growth – Are They Compatible? Part 3. Income Redistribution via Taxes and Transfers Across OECD Countries," OECD Economics Department Working Papers 926, OECD Publishing.
    23. Jesse Rothstein, 2009. "Is the EITC Equivalent to an NIT? Conditional Cash Transfers and Tax Incidence," NBER Working Papers 14966, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Earned Income Tax Credit;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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