Tax Refunds and Income Manipulation - Evidence from the EITC

Florian Buhlmann, Benjamin Elsner () and Andreas Peichl

No 201809, Working Papers from School of Economics, University College Dublin

Abstract: Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the US.

Keywords: EITC; Bunching; Income manipulation (search for similar items in EconPapers)
JEL-codes: H20 H24 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-06
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://hdl.handle.net/10197/9450 First version, 2018 (application/pdf)

Related works:
Journal Article: Tax refunds and income manipulation: evidence from the EITC (2018)
Working Paper: Tax refunds and income manipulation: evidence from the EITC (2018)
Working Paper: Tax Refunds and Income Manipulation Evidence from the EITC (2018)
Working Paper: Tax Refunds and Income Manipulation Evidence from the EITC (2017)
Working Paper: Tax refunds and income manipulation evidence from the EITC (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201809

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