Question

I need solution for this issue with all the details./Br/Ha

Nada Eissa and Jeffrey Liebman analysed an extension of the EITC that took place in 1987 in their study titled “Labor Supply Response to the Earned Income Tax Credit”.

a) How did the study exploit the extension of the EITC? That is what was the empirical strategy? What is the main assumption when using this strategy? Do you think that this assumption was satisfied in the case here?

b) What did the study find? Is this in line with the predictions made by the model used in Q.1)?

Answer 1

(A) ABOUT "EITC"

The full form of "EITC" Is "EARNED INCOME TAX CREDIT " ITS ALSO KNOWN AS " EARNED INCOME CREDIT " . The United States federal has introduced this initiative as a Refundable Tax Credit . this is basically for the low -to the moderate-income working individuals or couples particularly those with children . The amount of its benefits totally depends upon the recipient's income and the numbers of children they are having . The requirements for the claims for one and more persons as there qualifying children as relationship,age and the residency must be met .

childless workers that have income below about $14,340 can receive a very small EITC benefit . For the year 2019 , the maximum EITC benefit for the single person or couple filing without qualifying children is $529. these amounts normally indexed annually for inflation .

THE STUDY TITLED " LABOR SUPPLY RESPONSE TO THE EARNED INCOME TAX CREDIT" EXPLOITED IT AS

The EITC provides financial incentives to workers based on their earnings , the economic theory suggest that EITC have two effects on labor force i.e.

1 - It can encourage the non-workers to begin working .

2 - It can effect the numbers of hours they work .

As EITC phase , it increases the marginal return to work which should theoretically encourage workers to work more hours . Over the earning range where the credit value is constant , it has neither a negative or positive effect on POST-EITC earning and so should have little effect on hours worked . as the credit phase out , it decreases the return to work . This would lead to the workers working less than they use to work . the economist describes the phase out as one component that increases the effective marginal tax rates for the low wage workers . it is the additional dollars earning that is unavailable to the workers because it is either paid in taxes or offset in the reductions in the benefits .

ASSUMPTIONS WHEN USING THIS STRATEGY

1- Less unemployment level .

2- Raising the income level .

3- Improving the living standards

4- Encouraging workers to work more hours .

5- Paying the income credits as per the qualifying children

THE EMPIRICAL STRATEGY

The one of the most important strategy for this was to encourage the workers whether they are single or couple to work more and to motivate them they provide the income credits to them for there qualifying children . Its mainly for the person having children . As the singles can live there livelihood with the limited income they earns . By providing the incentive to the workers they will get more motivated and other unemployed person will also get motivated by seeing this . due to this unemployment will decrease and workers will start working more due to which they will increase there level of earning and at the end they will reach the level where they don't need the income credits and will enhance there livelihood .

YES , AS PER ME IN SOME CASES THESE ASSUMPTIONS ARE SATISFIED

As per the assumption the works do increases the level of there working and there livelihood , the unemployment do reduces and they do work more then the time they use to do . But after the effective marginal tax rate , there income do not remain to them and the level of taxes will increases side by side . Overall its a good strategy in the cases of Labor Supply .

(B) WHAT DID THE STUDY FINDS

That the tax reform Act of 1986 , which includes an expansion of the earned income tax credit , on the labor force participation and the hours of work of single women with children . Its impact leads to the change in the labor supply of single women with children to the change for the single women without children . its shown that between 1986- 1990, single women with children increased their relative labor force participation by up to 2.8 %age points. its observe no change in the relative hours worked by single women with children who were already in the labor force