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Economic Brief

March 2011, No. 11-03

The Earned Income Tax Credit: Recipients, Labor Force Participation, and Credit Constraints

Kartik B. Athreya and Aaron Steelman

There has been a longstanding debate in the United States about how to assist low-income families. The Earned Income Tax Credit (EITC) is designed to augment income while encouraging work: The tax credit increases with earnings for low levels of household income, but declines and ultimately is phased out as incomes rise. The EITC appears to have increased labor force participation but its effects on hours worked is ambiguous. Given the low levels of net wealth of most EITC recipients, it is likely that many are credit constrained and unable to smooth their consumption patterns.

Additional Resources

Athreya, Kartik B., Devin Reilly, and Nicole B. Simpson, "Earned Income Tax Recipients: Income, Marginal Tax Rates, Wealth, and Credit Constraints," Federal Reserve Bank of Richmond Economic Quarterly, Third Quarter 2010, vol. 96, no. 3, pp. 229-258.

Eissa, Nada and Hilary Hoynes, "Taxes and the Labor Market Participation of Married Couples: The Earned Income Tax Credit," Journal of Public Economics, August 2004, vol. 88, iss. 9-10, pp. 1,931-1,958.

Grogger, Jeffrey, "Welfare Transitions in the 1990s: The Economy, Welfare Policy, and the EITC," Journal of Policy Analysis and Management, Autumn 2004, vol. 23, no. 4, pp. 671-695. (Article available online with subscription.)

Hotz, V. Joseph and John Karl Scholz, "Not Perfect but Still Pretty Good: The EITC and Other Policies to Support the U.S. Low-Wage Labour Market," OECD Economic Studies, April 2000, no. 31/II, pp. 25-42.

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