Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply

43 Pages Posted: 20 Jul 2012 Last revised: 27 Jul 2012

See all articles by Nada Eissa

Nada Eissa

Georgetown University; National Bureau of Economic Research (NBER)

Hilary Williamson Hoynes

University of California, Berkeley; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: November 2005

Abstract

Twenty-two million families currently receive a total of $34 billion dollars in benefits from the Earned Income Tax Credit (EITC). In fact, the EITC is the largest cash transfer program for lower-income families at the federal level. An unusual feature of the credit is its explicit goal to use the tax system to encourage and support those who choose to work. A large body of work has evaluated the labor supply effects the EITC and has generated several important findings regarding the behavioral response to taxes. Perhaps the main lesson learned from the evidence is the confirmation that real responses to taxes are important; labor supply does respond to the EITC. The second major lesson is related to the nature of the labor supply response. A consistent finding is that labor supply responses are concentrated along the extensive (entry) margin, rather than the intensive (hours worked) margin. This distinction has important implications for the design of tax-transfer programs and for the welfare evaluation of tax reforms.

Suggested Citation

Eissa, Nada O. and Hoynes, Hilary Williamson, Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply (November 2005). NBER Working Paper No. w11729, Available at SSRN: https://ssrn.com/abstract=2114003

Nada O. Eissa (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

National Bureau of Economic Research (NBER)

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Hilary Williamson Hoynes

University of California, Berkeley ( email )

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Berkeley, CA 94720
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National Bureau of Economic Research (NBER)

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United States

IZA Institute of Labor Economics

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Germany

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