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American Economic Review: Vol. 103 No. 7 (December 2013)

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Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings

Article Citation

Chetty, Raj, John N. Friedman, and Emmanuel Saez. 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings." American Economic Review, 103(7): 2683-2721.

DOI: 10.1257/aer.103.7.2683

Abstract

We estimate the impacts of the Earned Income Tax Credit on labor supply using local variation in knowledge about the EITC schedule. We proxy for EITC knowledge in a Zip code with the fraction of individuals who manipulate reported self-employment income to maximize their EITC refund. This measure varies significantly across areas. We exploit changes in EITC eligibility at the birth of a child to estimate labor supply effects. Individuals in high-knowledge areas change wage earnings sharply to obtain larger EITC refunds relative to those in low-knowledge areas. These responses come primarily from intensive-margin earnings increases in the phase-in region.

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Authors

Chetty, Raj (Harvard U)
Friedman, John N. (Harvard U)
Saez, Emmanuel (U CA, Berkeley)

JEL Classifications

H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H31: Fiscal Policies and Behavior of Economic Agents: Household
J22: Time Allocation and Labor Supply
J23: Labor Demand
J31: Wage Level and Structure; Wage Differentials


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