EVIDENCE ON THE WORK DISINCENTIVES IN THE STRUCTURE OF THE EARNED INCOME TAX CREDIT

This study tests the general theory that specific individuals or groups do not necessarily behave according to legislative intent, in the context of the benefit structure of the Earned Income Tax Credit (EITC). There is considerable debate as to the existence of work disincentives in the ranges of the EITC. In the phase-in range, EITC benefits increase as earned income increases, creating a work incentive. Households receiving means tested social welfare benefits may be responding to the work disincentive of losing social welfare benefits as earned income rises, rather than the work incentive in the EITC structure. In the phase-out range of the credit, benefits decrease as earned income increases, creating a work disincentive. It is assumed that EITC recipients are aware of this disincentive, only earning enough income to qualify for the maximum EITC benefit. This population may be unaware of the subtleties of the EITC structure, or the loss in EITC benefits may not be sufficient to offset additional income from earnings.; Households within the phase-in and maximum ranges of the EITC are not homogeneous. However, certain households within the EITC ranges are more likely than others to react to a work disincentive. Actual household data from the Panel Study of Income Dynamics is used to detect patterns of EITC eligibility over several years. Previous research used simulations or hypothetical examples, in one time frame, to explain the behavior of EITC recipients. Extant research treats EITC recipients as a homogeneous group. In this study, several income and demographic variables are used to differentiate EITC households.; The results show that households within the two ranges are not homogeneous. AFDC recipient households in the phase-in range appear to be responding to a work disincentive. Evidence suggests that households in the maximum range, whose nontaxable sources of income are greater than taxable sources, are also responding to a work disincentive.