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The EITC and the labor supply of adult dependents: direct effects and family income effects

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Abstract

Tax data suggest that the population of adult dependents—adults relying on the support of others for the majority of their financial needs—has more than doubled over the last decade. However, little is known about how taxes affect the labor supply decisions of this population. This paper provides an initial investigation, studying the impact of the Earned Income Tax Credit (EITC) expansions of the early 1990s on the labor supply of adult dependents living with their relatives. I find that dependent individuals who were not a part of the nuclear family responded to the EITC expansions, increasing labor force participation by about 5 percentage points. For adult children, I show that the absence of a net response is likely due to an unexpected consequence of the EITC: expanded family credits led to a decrease in their labor force participation.

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Notes

  1. These numbers, as well as those cited in the abstract, are based on the Internal Revenue Service’s (1992–2014) Statistics of Income Table 2.3.

  2. My observation that family resources may affect dependent labor supply decisions aligns with Hahn and Yang (2016), who demonstrate that access to parental health insurance reduces the labor supply of young adults.

  3. Historical EITC parameters going back to 1975 can be obtained from the Tax Policy Center at http://www.taxpolicycenter.org/statistics/eitc-parameters.

  4. Negative values in Fig. 1 suggest the individual filing separately minimizes the family's tax liability.

  5. For these calculations, I assume that no adult dependents are claimed by the primary family. If the dependents of interest were claimed, this would only further reduce the possibility that the primary filer(s) would be affected by the tax bracket changes.

  6. There are some exceptions to this for dependent children. More details are provided in IRS Publication 17, Chapter 3.

  7. I extracted CPS data using IPUMS-CPS (Flood et al. 2015).

  8. Neither of these restrictions has a notable impact on the results.

  9. Step children are counted as children throughout this paper.

  10. Taxable income is calculated using total income less retirement income, survivor’s benefits, and disability benefits, provided the sum of these deductions is under $25,000. I also deduct worker's compensation if the individual does not receive social security or social security insurance, and social security income if the individual’s total income is under $25,000. Personal exemptions and standard deductions are not deducted.

  11. Evidence of strategic income reporting can be found in LaLumia (2009); Saez (2010).

  12. See U.S. GAO (1993) for an extensive discussion of the predicted effects of the EITC and Saez (2010) for an exploration of intensive-margin effects using a sample of U.S. tax returns.

  13. Kaplan (2012) shows that employment rates can be important in determining coresidence decisions.

  14. State unemployment statistics were obtained from the U.S. Bureau of Labor of Statistics (1988–2012). Values are March seasonally adjusted unemployment rates.

  15. If dependents attached to high-education heads respond in the same manner, but to a differing extent, this would lead to underestimated effects.

  16. For more discussion of the TAXSIM model, see Feenberg and Coutts (1993).

  17. Rosenzweig and Wolpin (1994) find that government transfers are partial substitutes for family support. In this case, it is possible that children do not respond to an increase in their own credits because they are countered by a decrease in family support.

  18. Labor force participation and job quality are only two of several factors that may affect the decision to leave the household. Other factors include age (Rosenzweig and Wolpin 1993; Ahn and Sánchez-Marcos 2015); sibling relationships (Aparicio-Fenoll and Oppedisano 2016); mortgage interest rates (Martins and Villanueva 2009); and family resources (Rosenzweig and Wolpin 1993; Manacorda and Moretti 2006; Battistin et al. 2009; Stella 2016).

  19. The limited response among parental dependents could be explained in one of two ways. First, increases in family wealth may be shared less with parents. Alternatively, the limited response may be a consequence of complex childcare decisions for parents of the household head. Wheelock and Jones (2002) find that grandparents may exchange childcare for support from their children. Aassve et al. (2012) find that the availability of grandparents for childcare affects family planning.

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Correspondence to Margaret Katherine McKeehan.

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McKeehan, M.K. The EITC and the labor supply of adult dependents: direct effects and family income effects. Rev Econ Household 16, 791–807 (2018). https://doi.org/10.1007/s11150-017-9370-4

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