Labor Supply and Participation Effects of the Earned Income Tax Credit: Evidence form the National Survey of America's Families and Wisconsin's Supplemental Benefit for Families with Three Children

We use the National Survey of America's Families to examine the labor market consequences of the Earned Income Tax Credit (EITC) by comparing labor market behavior of eligible parents in Wisconsin, which supplements the federal EITC for families with three children, to the labor market behavior of otherwise similar parents in states that do not supplement the federal tax credit. Most previous empirical studies have either relied on changes in the overall level of EITC benefits over time, as in the 1987 and 1993 program expansions, or have extrapolated from measured labor supply responses to other tax and benefit programs, assuming that responses to those programs will be similar to EITC responses. By contrast, our cross-state comparison examines a larger difference in EITC benefits, and one that can be directly attributed to the EITC program rather than to related programs. For example, a three-child family in Wisconsin is eligible for an extra 17.2 percent tax credit (43 percent of the 40 percent federal credit) above that received by a comparable family in a state with no supplemental EITC -a difference larger than the entire federal EITC during its expansion in 1987 from 11 to 14 percent.