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

Maren Froemel () and Charles Gottlieb ()
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Maren Froemel: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 903, Bank of England working papers from Bank of England

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.

Keywords: Heterogeneous agents; redistribution; welfare programs (search for similar items in EconPapers)
JEL-codes: E60 E62 H23 H24 I38 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-01-15
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Earned Income Tax Credit: Targeting the poor but crowding out wealth (2021)
Working Paper: The Earned Income Tax Credit: Targeting the Poor but Crowding Out Wealth (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0903

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