DOES THE EARNED INCOME TAX CREDIT REDUCE SAVING BY LOW-INCOME HOUSEHOLDS?

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 I 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.