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Title: Who Gets the Earned Income Tax Credit? Impact and Incidence

Citation Type: Miscellaneous

Publication Year: 2003

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Abstract: How are hourly wages affected by the Earned Income Tax Credit? Using variation in state EITC supplements, which magnify the effect of the federal EITC, I find that a 10 percentage point increase in the generosity of the EITC is associated with a 4 percent fall in the wages of high school dropouts, and a 2 percent fall in the wages of those with only a high school diploma. This is consistent with other EITC studies, which have shown that the EITC increases the labor supply of lower-skilled workers. Despite the fact that workers with children receive a more generous tax credit than childless workers, the hourly wages of both groups are similarly affected by an increase in the EITC. This suggests that the impact of the EITC on wages is determined by the typical EITC parameters in an employee's labor market, rather than by the individual's own EITC eligibility. To see how employees respond to the credit, I construct a simulated instrument for the EITC parameters in an employee's labor market. Wages respond to variation in the fraction of eligible employees and the average EITC rate, but do not respond systematically to changes in the marginal EITC rate.

Url: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.378.2207&rep=rep1&type=pdf

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Authors: Leigh, Andrew

Publisher: Harvard University

Data Collections: IPUMS USA

Topics: Poverty and Welfare

Countries: United States