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

Andrew Leigh

No 4960, IZA Discussion Papers from Institute of Labor Economics (IZA)

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; simulated instrument; labor supply (search for similar items in EconPapers)
JEL-codes: H22 H23 J22 J30 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-05
New Economics Papers: this item is included in nep-lab and nep-pub
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Citations: View citations in EconPapers (80)

Published - published in: B.E. Journal of Economic Analysis and Policy: Advances in Economic Analysis and Policy, 2010, 10 (1), Article 45

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Related works:
Journal Article: Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms (2010)
Working Paper: Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms (2005)
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