Taxpayers in different states receive different amounts in tax rebates
The size of the EITC subsidy varies greatly from state to state, with taxpayers with the same income but living in different states receiving different amounts in tax rebates from the programme. As a result of this state of affairs, the top tax rate for the EITC also fluctuates considerably in the individual states and over the course of the observation period for the study. Remarkably, the higher the top tax rate is, the higher the number of self-employed people claiming these subsidies.
“We can see that when a state raises the EITC top tax rate, this is followed by a disproportionate number of claims from self-employed workers who report their taxable income in such a way as to receive the highest possible tax credit they can,” explains Florian Buhlmann, researcher in the ZEW Research Group ‘International Distribution and Redistribution’ and co-author of the study. “The more generous the incentives from the government programme, the more strongly workers reacted by using strategies to get as high a subsidy from the programme as possible,” says ZEW Research Associate and department head at the ifo Professor Andreas Peichl, summarising the findings of the study.
Though the results of the study can be tracked over the entire observation period, there is a significant drop between the years 2007 and 2009 which the researchers attribute to the onset of the financial crisis in the US. This is because during this period in general there was a higher number of self-employed workers applying for subsidies.