The Earned Income Tax Credit:Targeting the Poor but Crowding Out Wealth

This paper quantifies the individual, aggregate and welfare effects of the Earned Income Tax Credit (EITC). In particular, we analyze the labor supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labor income and a tax on savings. An increase in EITC generosity raises labor force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population.