Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income

Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income: “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.