EFFECTS OF THE EARNED INCOME TAX CREDIT ON INCOME AND WELFARE

Abstract

This paper uses the familiar static labor supply model to estimate the effects of the earned income tax credit (EITC) on disposable money income and welfare for the recipient population. Since about two-thirds of recipients, and 84 percent of total earnings, are in the phase-out range of the program, the emphasis is on this group. Using average values for compensated wage elasticities and total income elasticities from the empirical literature, it is estimated that nearly half of recipients in the phase-out range will reduce earnings enough so that their total disposable money incomes decline. In addition, the marginal net benefit averages less than 50 cents per dollar of program cost for this group.