The Earned Income Tax Credit: Targeting the Poor but Crowding out Wealth

35 Pages Posted: 19 Jan 2021

See all articles by Maren Froemel

Maren Froemel

Bank of England

Charles Gottlieb

University of St. Gallen - SEPS: Economics and Political Sciences

Date Written: January 15, 2021

Abstract

This paper quantifies the individual, aggregate and welfare effects of the Earned Income Tax Credit (EITC) in the United States. In particular, we analyse the labour supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labour income and a tax on savings. An increase in EITC generosity raises labour force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population.

Keywords: Heterogeneous agents, redistribution, welfare programs

JEL Classification: E60, E62, H23, H24, I38

Suggested Citation

Froemel, Maren and Gottlieb, Charles, The Earned Income Tax Credit: Targeting the Poor but Crowding out Wealth (January 15, 2021). Bank of England Working Paper No. 903, Available at SSRN: https://ssrn.com/abstract=3768682 or http://dx.doi.org/10.2139/ssrn.3768682

Maren Froemel (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Charles Gottlieb

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland

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