An empirical analysis of the effect of the earned income tax credit on work effort

Abstract

The purpose of this study is to further the examination of the effectiveness of the earned income tax credit (EITC) in meeting one of Congress' major objectives for the credit: increasing work incentives. Economic theory predicts a potential work incentive in the phase-in range of the credit and a potential work disincentive in the phase-out range. This study utilizes empirical analysis of individual tax return data to evaluate EITC participants' and comparable non-participants' wage income cross-sectionally and over time for indications of statistically significant changes. Observations are grouped into income classifications based on the income ranges of the credit: phase-in, plateau, and phase-out.The wages for EITC participants, as well as for non-participants, increased significantly over selected time windows during the 1979 to 1990 time period. Wage growth for both participants and non-participants was greater in the phase-in range than in the phase-out range. The potential existence of significant differences in income growth between participants andnon-participants is only indicated for the time period of the mid-1980s, before the major increase in the credit post-1986. Contrary to theory, the current study estimates a potential disincentive in the mid-1980s in the phase-in range, as well as the phase-out range. However, after the post-1986 increase in the credit, the differences between the participants and non-participants are no longer statistically significant and a potential disincentive cannot be inferred.

Citation

Anders, S.B. (2002), "An empirical analysis of the effect of the earned income tax credit on work effort", Advances in Taxation (Advances in Taxation, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 1-35. https://doi.org/10.1016/S1058-7497(02)14004-X