Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms

Andrew Leigh

No 494, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: How are hourly wages affected by the Earned Income Tax Credit? Two strategies are utilized to determine the relationship between the credit and hourly wages. First, I use variation in state EITC supplements, which magnify the effect of the federal EITC. I find that a 10 percent 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, while having no effect on the wages of college graduates. Given standard estimates of labor demand, this is consistent with the common finding that the EITC boosts labor supply. Although workers with children receive a more generous tax credit than childless workers, and the effect of the credit on labor force participation is larger for those with children, the hourly wages of both groups are similarly affected by an increase in the overall generosity of the EITC. A second strategy is then implemented, based on the insight 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. Constructing a simulated instrument for the EITC parameters in an employee’s labor market, I find that 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.

Keywords: taxation incidence; labor supply; simulated instrument (search for similar items in EconPapers)
JEL-codes: H22 H23 J22 J30 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2005-08
New Economics Papers: this item is included in nep-lab and nep-pbe
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms (2010)
Working Paper: Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:auu:dpaper:494

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