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

Author

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  • Mike Brewer

    () (Institute for Fiscal Studies and University of Essex)

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.

Suggested Citation

  • Mike Brewer, 2000. "Comparing in-work benefits and financial work incentives for low-income families in the US and the UK," IFS Working Papers W00/16, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:00/16
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    File URL: http://www.ifs.org.uk/wps/wp0016.pdf
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    References listed on IDEAS

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    1. 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.
    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.
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    12. 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.
    13. 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.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. repec:ces:ifodic:v:1:y:2003:i:2:p:14567956 is not listed on IDEAS
    4. Peter H. Lindert, 2003. "Why the Welfare State Looks Like a Free Lunch," NBER Working Papers 9869, National Bureau of Economic Research, Inc.
    5. Wolfgang Ochel, 2003. "Welfare to Work in the United Kingdom," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(2), pages 56-62, 02.
    6. 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.
    7. Wolfgang Ochel, 2001. "Financial Incentives to Work - Conceptions and Results in Great Britain, Ireland and Canada," CESifo Working Paper Series 627, CESifo Group Munich.

    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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