Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply

Nada Eissa, Hilary Hoynes

NBER Working Paper No. 11729
Issued in November 2005
NBER Program(s):Labor Studies, Public Economics

Twenty-two million families currently receive a total of $34 billion dollars in benefits from the Earned Income Tax Credit (EITC). In fact, the EITC is the largest cash transfer program for lower-income families at the federal level. An unusual feature of the credit is its explicit goal to use the tax system to encourage and support those who choose to work. A large body of work has evaluated the labor supply effects the EITC and has generated several important findings regarding the behavioral response to taxes. Perhaps the main lesson learned from the evidence is the confirmation that real responses to taxes are important; labor supply does respond to the EITC. The second major lesson is related to the nature of the labor supply response. A consistent finding is that labor supply responses are concentrated along the extensive (entry) margin, rather than the intensive (hours worked) margin. This distinction has important implications for the design of tax-transfer programs and for the welfare evaluation of tax reforms.

download in pdf format
   (440 K)

email paper

A non-technical summary of this paper is available in the August 2006 NBER Digest.  You can sign up to receive the NBER Digest by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11729

Published: Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, Nada Eissa, Hilary W. Hoynes. in Tax Policy and the Economy, Volume 20, Poterba. 2006

Users who downloaded this paper also downloaded* these:
Meyer and Rosenbaum w7491 Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects
Hotz and Scholz w11968 Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare
Chetty and Saez w14836 Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients
Eissa and Liebman w5158 Labor Supply Response to the Earned Income Tax Credit
Grogger w9472 Welfare Transitions in the 1990s: The Economy, Welfare Policy, and the EITC
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us