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Should we subsidize work? Welfare reform, the earned income tax credit and optimal transfers

  • Gregory Acs


  • Eric Toder


During the 1990s, US income transfer and tax policies shifted towards trying to encourage work among low-income families. Optimal tax theory, however, suggests that work subsidies are usually an inefficient way to raise the incomes of poor families unless the work effort of recipients has external benefits and/or tax payer/voters prefer redistributing income to the working poor rather than the idle poor. This paper discusses the conditions under which work subsidies may be economically efficient and assesses empirical evidence that suggests that welfare reform and expansions of the EITC have increased work effort among low income families, but is inconclusive about whether the policy shift has enabled them to advance beyond entry-level jobs or benefited their children. Copyright Springer Science+Business Media, LLC 2007

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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 14 (2007)
Issue (Month): 3 (June)
Pages: 327-343

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Handle: RePEc:kap:itaxpf:v:14:y:2007:i:3:p:327-343
DOI: 10.1007/s10797-006-9010-z
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  1. Bruce D. Meyer & Dan T. Rosenbaum, 1999. "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects," JCPR Working Papers 152, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Saul D. Hoffman & Laurence S. Seidman, 2003. "Helping Working Families: The Earned Income Tax Credit," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number hwf, November.
  3. Rebecca M. Blank, 2002. "Evaluating Welfare Reform in the United States," Journal of Economic Literature, American Economic Association, vol. 40(4), pages 1105-1166, December.
  4. Gregory Acs & Pamela Loprest, 2004. "Leaving Welfare: Employment and Well-Being of Families that Left WElfare in the Post-Entitlement Age," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number lw, November.
  5. V. Joseph Hotz & John Karl Scholz, 2001. "The Earned Income Tax Credit," NBER Working Papers 8078, National Bureau of Economic Research, Inc.
  6. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
  7. Robert F. Schoeni & Rebecca M. Blank, 2000. "What Has Welfare Reform Accomplished? Impacts on Welfare Participation, Employment, Income, Poverty, and Family Structure," Working Papers 00-02, RAND Corporation.
  8. Louis Kaplow, 1989. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
  9. Michael P. Keane & Robert A. Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
  10. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  11. Neeraj Kaushal & Robert Kaestner, 2001. "From Welfare to Work: Has Welfare Reform Worked?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 20(4), pages 699-719.
  12. David T. Ellwood & Jeffrey B. Liebman, 2000. "The Middle Class Parent Penalty: Child Benefits in the U.S. Tax Code," NBER Working Papers 8031, National Bureau of Economic Research, Inc.
  13. Joel Slemrod, 1989. "Optimal Taxation and Optimal Tax Systems," NBER Working Papers 3038, National Bureau of Economic Research, Inc.
  14. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  15. Louis Kaplow, 2006. "Optimal Income Transfers," NBER Working Papers 12284, National Bureau of Economic Research, Inc.
  16. Jeffrey Grogger, 2003. "The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Headed Families," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 394-408, May.
  17. Dickert-Conlin, Stacy & Houser, Scott, 2002. "EITC and Marriage," National Tax Journal, National Tax Association, vol. 55(N. 1), pages 25-40, March.
  18. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
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