EITC and the Self-employed

Abstract

Saez finds that the budget constraint nonlinearities caused by the earned income tax credit (EITC) lead to bunching behavior for the self-employed but not for salaried workers. Possible explanations for these findings are both differences in flexibility of hours worked and differences in tax noncompliance opportunities among these two groups. This article provides evidence on the mechanism underlying this differential bunching behavior. By comparing estimates of labor supply effects of the EITC from two different data sets, where individuals have different incentives to misreport income, my article suggests that the bunching behavior found in Saez is mainly driven by tax noncompliance. Moreover, I find that real labor supply responses of the self-employed are similar to those of salaried workers.