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The optimal long‐run earned income tax credit

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  • Eitan Regev
  • Michel Strawczynski

Abstract

Governments implementing an earned income tax credit (EITC) aim to increase the propensity to work of the working poor in order to alleviate poverty. If this goal is attained in the long run, will the optimal EITC increase or decrease? We deal with this question using simulations with endogenous participation and intensive‐margin elasticities. When the participation elasticity is endogenous, the optimal long‐run EITC decreases. However, if we add endogenous intensive‐margin elasticity, the optimal EITC increases because the working poor work harder, making the EITC cheaper at the margin. The optimal increasing long‐run EITC pattern holds also with a constant elasticity of labor.

Suggested Citation

  • Eitan Regev & Michel Strawczynski, 2021. "The optimal long‐run earned income tax credit," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(3), pages 284-308, September.
    • Handle: RePEc:bla:ijethy:v:17:y:2021:i:3:p:284-308
    DOI: 10.1111/ijet.12234
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    References listed on IDEAS

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