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The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?

Author

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  • Regev Eitan

    (Hebrew University of Jerusalem, Economics, Jerusalem, Israel)

  • Strawczynski Michel

    (Hebrew University of Jerusalem, Economics and Public Policy, Mount Scopus, Jerusalem, 91905, Israel)

Abstract

In this paper we ask the following question: Is the optimal Earned Income Tax Credit (EITC) schedule a trapezoid, as widely used by policy-makers, or is it a triangle? We show that a trapezoid is optimal only when the wage distribution among the working poor is even with a discrete jump for higher wage groups. Since this pattern is not in line with the observed wage distributions of countries, we conclude that the optimal schedule is a triangle. Our simulations show that the use of a trapezoid implies a substantial loss in terms of Social Welfare.

Suggested Citation

  • Regev Eitan & Strawczynski Michel, 2020. "The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(3), pages 1-16, July.
    • Handle: RePEc:bpj:bejeap:v:20:y:2020:i:3:p:16:n:9
    DOI: 10.1515/bejeap-2019-0421
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    References listed on IDEAS

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    1. Hilary W. Hoynes & Ankur J. Patel, 2018. "Effective Policy for Reducing Poverty and Inequality?: The Earned Income Tax Credit and the Distribution of Income," Journal of Human Resources, University of Wisconsin Press, vol. 53(4), pages 859-890.
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    5. Adi Brender & Michel Strawczynski, 2006. "Earned Income Tax Credit in Israel: System to Reflect the Characteristics of Labor Supply and Poverty," Israel Economic Review, Bank of Israel, vol. 4(1), pages 27-58.
    6. Jacob Bastian & Katherine Michelmore, 2018. "The Long-Term Impact of the Earned Income Tax Credit on Children’s Education and Employment Outcomes," Journal of Labor Economics, University of Chicago Press, vol. 36(4), pages 1127-1163.
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