The impact of the Earned Income Tax Credit on labor supply and taxpayer complianc

After recent major expansions, the Earned Income Tax Credit has emerged as a central part of the federal government's efforts to reduce poverty and welfare dependency among families with children. The EITC differs in two important ways from other programs designed to assist needy families with children. First, the EITC creates different labor supply incentives than do programs such as AFDC and Food Stamps. Second, the EITC is administered through the tax system rather than through the welfare system. The seven chapters of my dissertation focus on these two features of the EITC.;Chapter 1 discusses the EITC's role in reducing poverty, discouraging welfare dependency, and alleviating income inequality. It also summarizes the implications of my research for the design of transfer programs. Chapter 2 estimates the impact of the 1987 expansion of the EITC on the labor supply of single women with children. I find that the annual labor force participation rate of this population increased by 2.8 percentage points after the increase in the EITC. Chapter 3 conducts labor supply simulations using isoelastic utility functions calibrated to the true distribution of hours, wages, and unearned income in the U.S. economy, in order to analyze the optimal phaseout tax rate for the EITC. Chapter 4 presents a new structural model of labor supply that integrates monthly welfare incentives and annual tax incentives.;Chapter 5 uses an exact match of the March 1991 CPS to information from the tax returns of CPS adults in order to determine how many ineligible taxpayers receive the EITC. I find that 13 percent of EITC recipients do not have a child in their CPS household when they receive the credit. Chapter 6 uses the 1985 and 1988 Taxpayer Compliance Measurement Surveys to test whether EITC noncompliance is taxpayer error or taxpayer fraud. I estimate that at least a third of EITC noncompliance is due to tax evading behavior. Chapter 7 presents results of my interviews with potential and actual EITC recipients and with IRS auditors. It also analyzes EITC participation rates, the size of EITC tax refunds, and the dynamics of EITC recipiency.