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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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File URL: http://hdl.handle.net/10.1007/s10797-006-9010-z
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Article provided by Springer 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
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  1. Louis Kaplow, 2006. "Optimal Income Transfers," NBER Working Papers 12284, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
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  7. Robert F. Schoeni & Rebecca M. Blank, 2000. "What has Welfare Reform Accomplished? Impacts on Welfare Participation, Employment, Income, Poverty, and Family Structure," NBER Working Papers 7627, National Bureau of Economic Research, Inc.
  8. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  9. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  10. 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.
  11. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  12. 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.
  13. 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.
  14. Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
  15. V. Joseph Hotz & John Karl Scholz, 2001. "The Earned Income Tax Credit," NBER Working Papers 8078, National Bureau of Economic Research, Inc.
  16. 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.
  17. David T. Ellwood & Jeffrey B. Liebman, 2001. "The Middle-Class Parent Penalty: Child Benefits in the U.S. Tax Code," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 1-40 National Bureau of Economic Research, Inc.
  18. Dickert-Conlin, Stacy & Houser, Scott, 2002. "EITC and Marriage," National Tax Journal, National Tax Association, vol. 55(N. 1), pages 25-40, March.
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