Earned Income Tax Credits and Labor Supply: New Evidence from a British Natural Experiment

205 National Tax Journal Vol. LX, No. 2 June 2007 Abstract With many countries considering the adoption of a system of earned income tax credits, it is useful to analyze how different types of credits affect labor supply and earnings. This paper focuses on a 1999 reform to the UK tax credit system, which increased the value of the credit and reduced the phaseout rate. Using panel data, with individual fi xed effects, I compare eligibles and ineligibles within fi ve groups: all individuals; those whose demographic characteristics predict that they will have low earnings; single women; women in couples; and men in couples. Over a 15–month period, boosting the credit appears to have raised the labor participation rates, hours, and earnings of those who were eligible to receive it.