Expanding New York State's Earned Income Tax Credit Programme: the effect on work, income and poverty

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Abstract:

Given its favourable employment incentives and ability to target the working poor, the Earned Income Tax Credit (EITC) has become the primary antipoverty programme at both the federal and state levels. However, when evaluating the effect of EITC programmes on income and poverty, governments generally calculate the effect using simple accounting, where the value of the state or federal EITC benefit is added to a person's income. These calculations omit the behavioural incentives created by the existence of these programmes, the corresponding effect on labour supply and hours worked, and therefore the actual effect on income and poverty. This article simulates the full effect of an expansion of the New York State EITC benefit on employment, hours worked, income, poverty and programme expenditures. These results are then compared to those omitting labour supply effects. Relative to estimates excluding labour supply effects, the preferred behavioural results show that an expansion of the New York State EITC increases employment by an additional 14 244 persons, labour earnings by an additional $95.8 million, family income by an additional $84.5 million, decreases poverty by an additional 56 576 persons and increases costs to the State by $29.7 million.

Keywords: EITC; H24; I38; J22; labour supply; poverty

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.558478

Affiliations: Federal Reserve Board of Governors, Washington,DC 20551, USA

Publication date: June 1, 2012

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