In the new issue of Economic Quarterly, Kartik B. Athreya and Devin Reilly of the Richmond Fed and Nicole B. Simpson of Colgate University consider several relatively overlooked aspects of the Earned Income Tax Credit (EITC), the largest federal cash-assistance program for lower income families. The authors find significant differences between the labor market and life-cycle income characteristics of EITC recipients and non-recipients. For instance, the EITC increases lifetime earnings of recipients, with the effects being more pronounced earlier in life, when EITC levels are higher. The program has increased labor force participation but the effects on hours worked are unclear. Relatedly, the EITC acts like a negative income tax for those who qualify for the program. Thus, for very low income households, marginal tax rates are negative. However, effective marginal tax rates change as income rises. In particular, on average, single-parent households that receive the EITC face some of the highest marginal tax rates in the United States.
You can find the full text of this article and others in the latest issue of Economic Quarterly at: http://www.richmondfed.org/publications/research/economic_quarterly/.
Also in the Third Quarter 2010 issue:
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