Firm Responses to Earned Income Tax Credits: Evidence from Italy

Abstract

This paper uses administrative data to analyze the incidence effects of a large EITC program in Italy. I find that firms are an important vector of transmission of incidence: firms very exposed to the tax credit responded to the program by decreasing their employees’ earnings relative to less exposed firms. Evidence suggests that the response was mainly driven by a decrease in the earnings growth rather than by a decrease in earnings level. This finding is consistent with the presence of wage rigidities that prevent firms from directly lowering wages and suggests that the transmission of tax credit incidence from workers to firms happens in a dynamic way.

Keywords: Earned Income Tax Credits, Tax Incidence, Firm Responses, Wage Rigidity

JEL Classification: H22, H32, H53