The U.S. tax-transfer system and low-income households: Savings, labor supply, and household formation

Salvador Ortigueira and Nawid Siassi

No 06/2020, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: Eligibility and benefits for anti-poverty income transfers in the U.S. are based on both the means and the household characteristics of applicants, such as their filing status, living arrangement, and marital status. In this paper we develop a dynamic structural model to study the effects of the U.S. tax-transfer system on the decisions of non-college-educated workers with children. In our model workers face uninsurable idiosyncratic risks and make decisions on savings, labor supply, living arrangement, and marital status. We find that the U.S. anti-poverty policy distorts the cohabitation/marriage decision of single mothers, providing incentives to cohabit. We also find quantitatively important effects on savings, and on the labor supply of husbands and wives. Namely, the model yields a U-shaped relationship between the earnings of one spouse and the labor supply of the other spouse, a result that we also find in the data. We show that these U-shaped relationships stem in part from the current design of anti-poverty income programs, and that the introduction of an EITC deduction on the earnings of secondary earners-as proposed in the 21st Century Worker Tax Cut Act-would increase the employment rate of the spouses of workers earning between $15K and $35K, especially of female spouses.

Keywords: anti-poverty income transfers; household decisions; cohabitation and marriage (search for similar items in EconPapers)
JEL-codes: E21 H24 H31 J12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The U.S. Tax-Transfer System and Low-Income Households: Savings, Labor Supply, and Household Formation (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:062020

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