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Comparing in-work benefits and financial work incentives for low-income families in the US and the UK

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  • Mike Brewer

    ()
    (Institute for Fiscal Studies and ISER, Essex University)

Abstract

The goals of income transfer systems in the US and the UK for low-income families are to reduce poverty and welfare dependency and encourage work. Both the US and UK have made in-work benefits a key part of their strategy through the Earned Income Tax Credit (EITC) and Working Families' Tax Credit (WFTC) respectively. But although similar in aims, there are significant differences in how the WFTC and EITC are structured and how they work operationally. In both countries, the combination of in-work benefits and welfare benefits produces a theoretical budget constraint with good financial incentives for lone parents to take a minimum wage job, but poor incentives to increase earnings beyond that. Help with housing costs and childcare costs reduce financial work incentives in both countries. Two further factors make direct comparisons of financial work incentives difficult. First, little is known about take-up rates of in-work and other welfare benefit rates in the US and UK, but recent falls in the numbers of US welfare benefits suggest that take-up rates may vary considerably between and within countries. Second, the differences in assessment and payment mechanisms between the EITC and the WFTC mean that low-income families in the UK and US may respond very differently to apparently similar financial incentives.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W00/16.

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Date of creation: Aug 2000
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Handle: RePEc:ifs:ifsewp:00/16

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  1. Philip K. Robins, 1985. "A Comparison of the Labor Supply Findings from the Four Negative Income Tax Experiments," Journal of Human Resources, University of Wisconsin Press, vol. 20(4), pages 567-582.
  2. Timothy M. Smeeding & Katherin Ross Phillips & Michael O'Connor, 2000. "The EITC: Expectation, Knowledge, Use and Economic and Social Mobility," JCPR Working Papers 139, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. Nada Eissa & Hilary Williamson Hoynes, 1998. "The Earned Income Tax Credit and the Labor Supply of Married Couples," NBER Working Papers 6856, National Bureau of Economic Research, Inc.
  4. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  5. Bruce D. Meyer & Dan T. Rosenbaum, 2000. "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects," NBER Working Papers 7491, National Bureau of Economic Research, Inc.
  6. Gale, William G., 1997. "What Can America Learn from the British Tax System?," National Tax Journal, National Tax Association, vol. 50(4), pages 753-77, December.
  7. Chris Giles & Paul Johnson & Julian McCrae, 1997. "Housing benefit and financial returns to employment for tenants in the social sector," Fiscal Studies, Institute for Fiscal Studies, vol. 18(1), pages 49-72, February.
  8. Michael P. Keane & Robert Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
  9. Rebecca M. Blank & David Card & Philip K. Robins, 1999. "Financial Incentives for Increasing Work and Income Among Low- Income Families," HEW 9902002, EconWPA.
  10. Smeeding, Timothy M. & Phillips, Katherin Ross & O’Connor, Michael, 2000. "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1187-210, December.
  11. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  12. Robert Walker & Michael Wiseman, 1997. "The possibility of a British earned income tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 18(4), pages 401-425, November.
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  14. David Blau, 2003. "Child Care Subsidy Programs," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 443-516 National Bureau of Economic Research, Inc.
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Cited by:
  1. Peter H. Lindert, 2003. "Why the Welfare State Looks Like a Free Lunch," NBER Working Papers 9869, National Bureau of Economic Research, Inc.
  2. Wolfgang Ochel, 2003. "Welfare to Work in the United Kingdom," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 1(2), pages 56-62, 02.
  3. Paul Gregg, 2008. "UK Welfare Reform 1996 to 2008 and beyond: A personalised and responsive welfare system?," The Centre for Market and Public Organisation 08/196, Department of Economics, University of Bristol, UK.
  4. Mike Brewer & Paul Gregg, 2001. "Eradicating child poverty in Britain: welfare reform and children since 1997," IFS Working Papers W01/08, Institute for Fiscal Studies.
  5. Wolfgang Ochel, 2001. "Financial Incentives to Work - Conceptions and Results in Great Britain, Ireland and Canada," CESifo Working Paper Series 627, CESifo Group Munich.
  6. Marc Fleurbaey, 2003. "Social Welfare, Priority to the Worst-Off And the Dimensions of Individual Well-Being," IDEP Working Papers 0312, Institut d'economie publique (IDEP), Marseille, France.

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