Tax Refunds and Income Manipulation Evidence from the EITC

34 Pages Posted: 2 Dec 2017

See all articles by Florian Buhlmann

Florian Buhlmann

ZEW – Leibniz Centre for European Economic Research

Benjamin Elsner

IZA Institute of Labor Economics

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

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Date Written: October 27, 2017

Abstract

Welfare programs are important for reducing poverty but create incentives for recipients to maximize their income by either reducing labor supply or manipulating 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 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 a raise in 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 the Great Recession in 2007, we find no effect thereafter. These findings point to important behavioral responses to what is the largest welfare program in the US.

Suggested Citation

Buhlmann, Florian and Elsner, Benjamin and Peichl, Andreas, Tax Refunds and Income Manipulation Evidence from the EITC (October 27, 2017). ZEW - Centre for European Economic Research Discussion Paper No. 17-060, Available at SSRN: https://ssrn.com/abstract=3080225 or http://dx.doi.org/10.2139/ssrn.3080225

Florian Buhlmann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Benjamin Elsner (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.benjaminelsner.com

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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