Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income

60 Pages Posted: 13 Jul 2015 Last revised: 24 Apr 2021

See all articles by Hilary Williamson Hoynes

Hilary Williamson Hoynes

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

Ankur Patel

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: July 2015

Abstract

In this paper, we examine the effect of the EITC on the employment and income of single mothers with children. We provide the first comprehensive estimates of this central safety net policy on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 7.3 percentage point increase in employment and a 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. Event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. By capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.

Suggested Citation

Hoynes, Hilary Williamson and Patel, Ankur, Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income (July 2015). NBER Working Paper No. w21340, Available at SSRN: https://ssrn.com/abstract=2629945

Hilary Williamson Hoynes (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ankur Patel

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

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