RESEARCH REPORT

ECON 130, Summer Session I –Esra Kose

DUE IN CLASS

Your

This is Your Report #:

Title of Research Paper:

Authors:

Year:

Whatis the research question or goal of the study?

Thispaper explores the effects of the Tax Reform Act of 1986 thatencompassed the expansion of the earned income tax credit (EITC), onthe labor force participation and hours of work of single women withchildren. The goal is to establish whether the implementation of theEITC affects the participation of married and unmarried women inemployment,(labor supply response) and whether the EITC reduceswelfare dependency.

Whatdoes theory predict?

Thelabor supply theory predicts that the IETC will significantly augmentthe participation of tax payers that are affected by the IETCprogram.

Whatdo previous studies on the topic find? Are there issues with thesestudies? Describe.

Previousstudies have found that the impacts on EITC on the labor supply fortax payers in the phase-in, is ambiguous since EITC causessubstitution effects encourages additional working hours while theincome effects has a reverse impacts ( causes hours to decrease) .

Thosein the constand region are only liable t the income effects. For taxpayers who fall under the brackets of the phase-out region, the IETCbrings both negative income effects in the sense that it reduces thelabor supply and a negative substitution effects in the sense that itcredit is being phased out. Tax payers beyond the credit boundary mayopt to reduce their working hours and still receive the incomecredit. The main issue with these studies is that there may be othereconomic shocks or policies that affect the labor market and that ayinvariable affect the treatment population. The lack of a controlgroup may also have made them vulnerable to underlying trends. Afterthe expansion of EITC many tax payers may opt to reduce their workinghours since the change may affect their income past the level atwhich the credit s totally phased out.

Whatis the empirical strategy of this paper? How does it address theissues above?

Thisstudy attention is leveled on unmarried women with children toascertain the response of the labor supply after the introduction ofthe IETC. Unmarried women have been recognized as the most suitablegroup to use in this studybecause they make up the largest groupof taxpayers that form the base for the credit income. The EITC of1986 is chosen in this study due to the fact that it remained inforce for a couple of years and the fact that was the largestexpansion program. This means that its effects would be noticeableand easier to trace. This work compares the participation of laborforce before and after the introduction of the 1986 Act. This paperwill address the issue above by using a control group composed ofwomen without children. This study has also used two control groupsfor every treatment group the first control group is composed ofunmarried women with at least one child but with low level ofeducation while the second group is constituted of those with atleast secondary school education.

.This is meant to ensure that the actual impacts of the tax chnagesare monitored and not the trend difference and contemporaneouschanges between control group and treatment group. The study dependson time to establish the response of women in the labor force to theEITC.

Whatdo the authors find?

Theauthors establish that the participation level for the treatmentgroup increased significantly by a factor of 2.4 %, while that forthe unmarried without offspring (control group) did not change. Theauthor also establishes that the rate of participation for theintroduction of the TRA86 for women with children bur with a lessthan a high school education increases by 1.8%, those with more thansecondary school education increases by 0.9%. This means that the taxreform increased the participation rate of unmarried women withchildren.

Canyou think of any issues (problems) with this study?

Themain problem with this study is that the author cannot stateconclusively that business cycle is not responsible for the increasedparticipation of the treatment group. The author states that it isnot possible to estimate the effects of the tax reforms of 1986because changes in participation can be driven by shocks that arecorrelated with demographic features. It is extremely difficult toseparate the effects of the IETC and business cycle.

References

Eissa,N.and. Liebmanlabor, J.B. (1996).SupplyResponse to the Earned Income Tax Credit.