Is the EITC Equivalent to an Nit? Conditional Cash Transfers and Tax Incidence

43 Pages Posted: 19 May 2009 Last revised: 24 Nov 2022

See all articles by Jesse Rothstein

Jesse Rothstein

University of California, Berkeley, The Richard & Rhoda Goldman School of Public Policy; University of California, Berkeley, College of Letters & Science, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2009

Abstract

The Earned Income Tax Credit (EITC) is intended to encourage work. But EITC-induced increases in labor supply may drive wages down, shifting the intended transfer toward employers. I simulate the economic incidence of the EITC under a range of plausible supply and demand elasticities. In all of the scenarios that I consider, a substantial portion of the intended transfer to low income single mothers is captured by employers through reduced wages. The transfer to employers is borne in part by low skill workers who are not themselves eligible for the EITC and are therefore made strictly worse off by its existence. I contrast the EITC with a traditional Negative Income Tax (NIT). The NIT discourages work, and so induces large transfers from employers of low skill labor to their workers. With my preferred parameters the EITC increases after-tax incomes by $0.73 per dollar spent, while the NIT yields $1.39.

Suggested Citation

Rothstein, Jesse, Is the EITC Equivalent to an Nit? Conditional Cash Transfers and Tax Incidence (May 2009). NBER Working Paper No. w14966, Available at SSRN: https://ssrn.com/abstract=1405974

Jesse Rothstein (Contact Author)

University of California, Berkeley, The Richard & Rhoda Goldman School of Public Policy ( email )

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University of California, Berkeley, College of Letters & Science, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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