Essay Example on The article which has written by Nada Eissa and Hilary Williamson









This is the summary of the article which has written by Nada Eissa and Hilary Williamson Hoynes under the name of Taxes and the labor market participation of married couples the earned income tax credit published in 2004 in the Journal of Public Economics This research was looking for finding the response of the labor supply of married couples to expansions of the earned income tax credit EITC Most of the studies before our aforementioned research have examined the impact of EITC on workforce participation of single parents Dickert et al 1995 Eissa Liebman 1996 Meyer Rosenbaum 2000 2001 Keane Moffitt 1998 Ellwood 2000 Hotz et al 2002 Grogger 2003 Hotz Scholz 2003 or married couples Heckman 1992 Triest 1992 although Dickert et al 1995 Ellwood 2000 examined the impact on married couples with children by comparing the eligible and ineligible groups However Eissa Hoynes extended their analysis by parameterizing the effect of the EITC on after tax wages and unearned income The public assistance system of US has been changed to more focus on working families and be dependence on tax system to transfer the money to lower income families 

Advocates of EITC believe that in contrast the other welfare program components it causes less decrease in workforce participation and encourage the values of the family along with the values of work The EITC has established in 1975 and it was expanded in TRA86 Tax reform ACT of 1986 OBRA90 Omnibus Reconciliation Act of 1990 OBRA93 Omnibus Reconciliation Act of 1993 A taxpayer s eligibility for the EITC reliance on the taxpayer s earned income whether wage salary income or self employment income which must be positive below a specified amount and also the number of qualifying children less than 19 years or 24 years old if a full time student or permanently disabled who must reside with the taxpayer for more than 6 months According to the credit schedule in the initial phase the family receives an amount equal to the subsidy rate times their earnings while in the flat region the maximum credit transfers and finally in the phase out region the credit is phased out at the phase out rate In this article the data came from March Current Population Surveys to derive how the married couples workforce react to the EITC expansions between 1984 and 1996 The sample was restricted to 22 671 married couples with less than 12 years of schooling it was based on the wife s education in order to consider the likely affected population by EITC

They used traditional model of the unitary household labor supply which is included sequential two earners The primary earner the husband makes his labor supply decision independent of the secondary earner While the second mover for maximizing utility then makes her work decision by taking account of the primary earner s earnings and other household unearned income H1 h1 w1 Y X H2 h2 w2 Y w1H1 X The authors used two experimental approaches quasi experimental reduced form models First basic natural experiment strategy which is based on difference in differences methods employed to investigate the reaction of labor supply of EITC eligible and ineligible groups to OBRA93 the largest EITC expansion and the one increased the gap between the first and second child credit Then they distinguished the changes among the family with children and childless couples They mentioned that this approach relies on transparent sources of identification and a simple estimating framework However the advantage is offset by the limitations of the crucial results dependency on the validity of the comparison group Afterward in the second approach the sample restricted to the potentially eligible group married couples with children 17 178 couples eliminating any identification arising from the group differences Then they maintain the secondary earner model and estimate reduced form labor force participation equations that depend on the after tax wage and after tax non labor income

Therefore they parameterized the impact of EITC and other tax induced changes and estimated reduced form participation equations and examine its effects on married couples with children They identified that the main difference between the two approaches is in the use of group versus individual level variation in taxes In the quasi experimental approach all relevant wage and income changes are captured by group level variation in family type and size presence number of children and time While the reduced form approach has non neutral effects within groups and expands that strategy by using individual variation in net wages and net non labor income Finally the results from both the quasi experimental and reduced form models consistently indicate that the EITC expansions reduced overall family labor supply of married couples Although in sharp contrast the single women with children increase the labor supply substantially in response to the EITC The authors explained the EITC which is based on family income as opposed to individual income to target benefits to lower income families leading to a very different set of incentives for married taxpayers Primary earners may slightly increase labor force participation but most secondary earners in recipient families are expected to reduce their labor supply In all cases they find a decline in labor force participation by married women a full percentage point which is more than offsets any rise in participation by their spouses about 0 2 percentage These aggregate effects mask substantial heterogeneity in the population The findings imply that the EITC is effectively subsidizing married mothers to stay home and therefore have implications for the design of the program Eissa Hoynes argue the popular view that the credit encourages work effort is unlikely to hold among married couples because it seems an EITC is based on individual earnings as opposed to family earnings would offset the incentive for secondary earners to leave the labor force

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