Can Earned Income Tax Credits Earn Their Keep?: EITCs and In-Work Poverty in Comparative Perspective

Do earned income tax credits (EITCs) reduce in-work poverty? EITCs are tax instruments that promote income from work over income from transfer systems and is a fiscal policy increasingly used by many welfare states to achieve poverty reduction and increase work incentives. I argue that effects on in-work poverty may depend on how EITCs are organized. Building on previous research on the poverty impact of transfer systems, I develop unique macro-level indicators of EITCs across three dimensions: income targeting, generosity, and universalism. These indicators are combined with individual-level data from the Luxembourg Income Study (LIS) and show that when EITCs are more generous, in-work poverty risks increase. The latter seems to primarily be the case in systems where EITCs are relatively similar across the income distribution, and not low-income targeted. There are indications that poverty risks are lower when EITCs are low-income targeted, but effects are less pronounced. Overall, these results indicate that the ‘paradox of redistribution’—which suggests that low-income targeting of transfers is less effective at reducing poverty than universal approaches with higher transfer shares—does not hold in the context of fiscal welfare policies like EITCs.