Does the Earned Income Tax Credit Reduce Saving by Low-Income Households?

Caroline Weber ()

National Tax Journal, 2016, vol. 69, issue 1, 41-76

Abstract: This paper analyzes the effect of the Earned Income Tax Credit (EITC) on investment income. Policy-makers have devoted substantial time and resources toward increasing the saving rate of low-income households, yet the EITC provides a substantial disincentive for individuals to save and realize investment income. I find that a 1 percent increase in the after-tax return to saving causes a 3.05 percent increase in investment income. Nearly 40 percent of the decline over the last two decades in the fraction of EITC recipients with savings in income-bearing accounts can be explained by changing EITC incentives.

Date: 2016
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