The Earned Income Tax Credit: Targeting the Poor but Crowding out Wealth
35 Pages Posted: 19 Jan 2021
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
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