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

51 Pages Posted: 2 Dec 2003  

Andrew Leigh

Australian National University - Economics Program, Research School of Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

How are hourly wages affected by the Earned Income Tax Credit? Two strategies are utilized to determine the relationship between the credit and hourly wages. First, I use variation in state EITC supplements, which magnify the effect of the federal EITC. I find that a 10 percent increase in the generosity of the EITC is associated with a 4 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 standard estimates of labor demand, this is consistent with the common finding that the EITC boosts labor supply. Despite the fact that workers with children receive a more generous tax credit than childless workers, the hourly wages of both groups are similarly affected by an increase in the overall generosity of the EITC. A second strategy is then implemented, based on the insight that the impact of the EITC on wages is determined by the typical EITC parameters in an employee's labor market, rather than by the individual's own EITC eligibility. Constructing a simulated instrument for the EITC parameters in an employee's labor market, I find that wages respond to variation in the fraction of eligible employees and the average EITC rate, but do not respond systematically to changes in the marginal EITC rate.

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 (November 2003). Available at SSRN: https://ssrn.com/abstract=473445 or http://dx.doi.org/10.2139/ssrn.473445

Andrew Leigh (Contact Author)

Australian National University - Economics Program, Research School of Social Sciences ( email )

HC Coombs Building
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61261251374 (Phone)
+61261250182 (Fax)

HOME PAGE: http://econrsss.anu.edu.au/~aleigh/

Paper statistics

Downloads
218
Rank
89,754
Abstract Views
2,586