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Is the EITC as good as an NIT? Conditional cash transfers and tax incidence

Published Web Location

http://eml.berkeley.edu/~jrothst/publications/rothstein_eitc_AEJpp_may52009.pdf
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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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