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

  • Mike Brewer

    ()

    (Institute for Fiscal Studies and ISER, Essex University)

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. 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.
  2. M. Keane & R. Mofitt, 1995. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," Working Papers 95-4, Brown University, Department of Economics.
  3. Eissa, Nada & Hoynes, Hilary Williamson, 1999. "The Earned Income Tax Credit and the Labor Supply of Married Couples," Department of Economics, Working Paper Series qt1024b9z8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  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.
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  6. 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.
  7. 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.
  8. 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.
  9. Blank, Rebecca M. & Card, David & Robins, Philip K., 1999. "Financial Incentives for Increasing Work and Income Among Low-Income Families," Department of Economics, Working Paper Series qt2f15x7sg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. 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.
  11. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  12. 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.
  13. 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.
  14. 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.
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