The Earned Income Tax Credit and Reported Self-Employment Income

Abstract

The Earned Income Tax Credit subsidizes earnings from both the wage sector and the self-employment sector. This paper uses tax return data to investigate how the EITC affects the reporting of self-employment income to the IRS. A difference-in-difference strategy is used, considering three expansions in the EITC and comparing changes across filers with and without children. The expansions are predicted to increase the reporting of self-employment income for those in the phase-in region of the EITC and to reduce the reporting of self-employment income for those in the phase-out region. Among the lowest-income filers, the 1994 EITC expansion is associated with a significant increase in the probability of reporting positive self-employment income, equal to 3.2 percentage points for unmarried filers and 4.1 percentage points for married filers.EITC, self-employment