The earned income tax credit: targeting the poor but crowding out wealth

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 15 January 2021

Staff Working Paper No. 903

By Maren Froemel and Charles Gottlieb

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.

The earned income tax credit: targeting the poor but crowding out wealth

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