The Earned Income Tax Credit:Targeting the Poor but Crowding Out Wealth

In this paper, we quantify the effects of the Earned Income Tax Credit (EITC) from a macroeconomic perspective. We analyze jointly the labor supply and saving responses to changes in tax credit generosity and their aggregate and distributional implications. Our results show that the EITC raises labor force participation, provides insurance to working poor households but also disincentivizes private savings for many. Whilst reducing post-tax earnings inequality, the EITC contributes to a higher skill premium and wealth inequality. Finally, EITC expansions are welfare improving for the majority of the population, both ex ante and when accounting for transitional dynamics.