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Title: Frictional Adjustment to Income Tax Incentives: An Application to the Earned Income Tax Credit

Citation Type: Miscellaneous

Publication Year: 2020

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Abstract: In this paper we consider the behavioral response of workers to changes in tax incentives when faced with hours constraints and search frictions. In this setting, workers can respond by transitioning into employment, transitioning to new jobs, or accepting second jobs. We provide empirical evidence that all three adjustments are positive and significant in the response of single mothers to the Earned Income Tax Credit. We then estimate a frictional search model with hours constraints and multiple job holding that fits our empirical evidence, and use the model to explore the positive and normative implications of these frictions for tax policy analysis. We find that long-run employment elasticities are up to 73% larger than the short-run elasticity, which has direct implications for welfare analysis using deadweight loss tax formulae. We use the model to demonstrate that the degree of search frictions in a labor market, as measured by contact rates and job destruction rates, directly affects the welfare gains from the introduction of the EITC in addition to other counterfactual tax credit schedules.

Url: http://www.josephlyonmullins.com/MancinoMullins-EITC_Mar2020.pdf

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Authors: Mancino, Antonella; Mullins, Joseph

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