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Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence

Jesse Rothstein
American Economic Journal: Economic Policy
Vol. 2, No. 1 (February 2010), pp. 177-208
Stable URL: http://www.jstor.org/stable/25760056
Page Count: 32
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Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence
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Abstract

The EITC is intended to encourage work. But EITC-induced increases in labor supply may drive wages down. I simulate the economic incidence of the EITC. In each scenario that I consider, a large portion of low-income single mothers' EITC payments is captured by employers through reduced wages. Workers who are EITC ineligible also see wage declines. By contrast, a traditional Negative Income Tax (NIT) discourages work, and so induces large transfers from employers to their workers. With my preferred parameters, $1 in EITC spending increases after-tax incomes by $0.73, while $1 spent on the NIT yields $1.39.

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