Does the earned income tax credit reduce saving by low-income households?

C Weber - National Tax Journal, 2016 - journals.uchicago.edu
National Tax Journal, 2016journals.uchicago.edu
This paper analyzes the effect of the Earned Income Tax Credit (EITC) on investment
income. Policy-makers have devoted substantial time and resources toward increasing the
saving rate of low-income households, yet the EITC provides a substantial disincentive for
individuals to save and realize investment income. I find that a 1 percent increase in the after-
tax return to saving causes a 3.05 percent increase in investment income. Nearly 40 percent
of the decline over the last two decades in the fraction of EITC recipients with savings in …
This paper analyzes the effect of the Earned Income Tax Credit (EITC) on investment income. Policy-makers have devoted substantial time and resources toward increasing the saving rate of low-income households, yet the EITC provides a substantial disincentive for individuals to save and realize investment income. I find that a 1 percent increase in the after-tax return to saving causes a 3.05 percent increase in investment income. Nearly 40 percent of the decline over the last two decades in the fraction of EITC recipients with savings in income-bearing accounts can be explained by changing EITC incentives.
The University of Chicago Press