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

45 Pages Posted: 29 Jun 2010

See all articles by Andrew Leigh

Andrew Leigh

Australian House of Representatives Parliament House; Centre for Applied Macroeconomic Analysis, ANU; IZA

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Abstract

How are hourly wages affected by the Earned Income Tax Credit? Using variation in state EITC supplements, I find that a 10 percent increase in the generosity of the EITC is associated with a 5 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 the large increase in labor supply induced by the EITC, this is consistent with most reasonable estimates of the elasticity of labor demand. Although workers with children receive a much larger EITC 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 EITC increase. As a check on this strategy, I also use federal variation in the EITC across gender-age-education groups, and find that those demographic groups that received the largest EITC increases also experienced a drop in their hourly wages, relative to other groups.

Keywords: taxation incidence, labor supply, simulated instrument

JEL Classification: H22, H23, J22, J30

Suggested Citation

Leigh, Andrew, Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms. IZA Discussion Paper No. 4960. Available at SSRN: https://ssrn.com/abstract=1631095

Andrew Leigh (Contact Author)

Australian House of Representatives Parliament House ( email )

Canberra, 2600
Australia

Centre for Applied Macroeconomic Analysis, ANU ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

IZA ( email )

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