Title

The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC

Author(s)

Jesse Rothstein Jesse Rothstein (Princeton University and NBER)

Abstract

The EITC is designed to encourage work. But EITC-induced increases in labor supply may drive wages down, shifting the intended transfer toward employers and hurting non- EITC low-skill workers. I exploit variation across family types and skill levels to identify the effect of a large EITC expansion in the mid 1990s. Ceteris paribus, low-skill single mothers keep only $0.70 of every dollar they receive. Employers of low-skill labor capture $0.72, $0.30 from single mothers plus $0.43 from ineligible workers whose after-tax incomes fall when the EITC is expanded. The net transfer to low-skill workers is less than $0.28 per dollar spent.

Creation Date

2008-05

Section URL ID

CEPS

Paper Number

165

URL

https://gceps.princeton.edu/wp-content/uploads/2017/01/165rothstein.pdf

File Function

Jel

D31, H20, H22, J20

Keyword(s)

Earned Income Tax Credit

Suppress

false

Series

3