TY - JOUR AU - Chetty,Raj AU - Friedman,John N. AU - Saez,Emmanuel TI - Using Differences in Knowledge Across Neighborhoods to Uncover the Impacts of the EITC on Earnings JF - National Bureau of Economic Research Working Paper Series VL - No. 18232 PY - 2012 Y2 - July 2012 UR - http://www.nber.org/papers/w18232 L1 - http://www.nber.org/papers/w18232.pdf N1 - Author contact info: Raj Chetty Department of Economics Harvard University 1805 Cambridge St. Cambridge, MA 02138 Tel: 617-744-9492 E-Mail: chetty@fas.harvard.edu John N. Friedman Harvard Kennedy School Taubman 356 79 JFK St. Cambridge, MA 02138 Tel: 617/233-6965 Fax: 617/496-1722 E-Mail: john_friedman@harvard.edu Emmanuel Saez Department of Economics University of California, Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 Tel: 510/642-4631 Fax: 510/642-6615 E-Mail: saez@econ.berkeley.edu AB - We develop a new method of estimating the impacts of tax policies that uses areas with little knowledge about the policy’s marginal incentives as counterfactuals for behavior in the absence of the policy. We apply this method to characterize the impacts of the Earned Income Tax Credit (EITC) on earnings using administrative tax records covering all EITC-eligible filers from 1996-2009. We begin by developing a proxy for local knowledge about the EITC schedule –the degree of “sharp bunching”at the exact income level that maximizes EITC refunds by individuals who report self-employment income. The degree of self-employed sharp bunching varies significantly across geographical areas in a manner consistent with differences in knowledge. For instance, individuals who move to higher-bunching areas start to report incomes closer to the refund-maximizing level themselves, while those who move to lower-bunching areas do not. Using this proxy for knowledge, we compare W-2 wage earnings distributions across neighborhoods to uncover the impact of the EITC on real earnings. Areas with high self-employed sharp bunching (i.e., high knowledge) exhibit more mass in their W-2 wage earnings distributions around the EITC plateau. Using a quasi-experimental design that accounts for unobservable differences across neighborhoods, we find that changes in EITC incentives triggered by the birth of a child lead to larger wage earnings responses in higher bunching neighborhoods. The increase in EITC refunds comes primarily from intensive-margin increases in earnings in the phase-in region rather than reductions in earnings in the phase-out region. The increase in EITC refunds is commensurate to a phase-in earnings elasticity of 0.21 on average across the U.S. and 0.58 in high-knowledge neighborhoods. ER -