The EITC Program in Israel: Employment Effects and Evidence on the Differential Impacts of Family vs. Individual-Income Based Design

Abstract

The Israeli EITC program is based on individual incomes, unlike the EITC programs in the US and the UK, which supplement low-income families' earnings according to the combined family income. Using a large administrative panel dataset of tax and benefit records, and the natural experiment created by the gradual implementation of the program, we find that the absence of interdependence between spouses' benefits curtails the negative employment effects that were found for married women in the US and the UK. We find that an increase of NIS 100 in the monthly EITC amount is associated with a reduction of 0.6 percentage points in the probability of an eligible person to stop working, and that EITC eligibility is associated on average with a reduction of 1- 1.5 percentage points in exits from employment, about 20-25 percent of the exit rate among the relevant populations. We also find that spousal collection of an EITC has no negative effect on employment, except among ultraorthodox women and young (ages 23-35) mothers to newborns (ages 0-2) that are not eligible for the EITC themselves. Finally, we find that the EITC has the largest positive effect on the employment of ultraorthodox men - a population characterized by low employment rates – and on older women (55+ years old). These findings stress the importance of EITC programs' design in balancing employment-encouragement and precise targeting of social expenditure for reducing poverty among low-income families.