The optimal earned income tax credit (EITC) schedule: A trapezoid or a triangle?

Eitan Regev; Michel Strawczynski

doi:10.1515/bejeap-2019-0421

The optimal earned income tax credit (EITC) schedule: A trapezoid or a triangle?

Eitan Regev, Michel Strawczynski^*

^*Corresponding author for this work

Department of Economics

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

In this paper we ask the following question: Is the optimal Earned Income Tax Credit (EITC) schedule a trapezoid, as widely used by policy-makers, or is it a triangle? We show that a trapezoid is optimal only when the wage distribution among the working poor is even with a discrete jump for higher wage groups. Since this pattern is not in line with the observed wage distributions of countries, we conclude that the optimal schedule is a triangle. Our simulations show that the use of a trapezoid implies a substantial loss in terms of Social Welfare.

Original language	English
Article number	20190421
Pages (from-to)	1-16
Number of pages	17
Journal	B.E. Journal of Economic Analysis and Policy
Volume	20
Issue number	3
DOIs	https://doi.org/10.1515/bejeap-2019-0421
State	Published - 1 Jul 2020

Bibliographical note

Publisher Copyright:
© 2020 De Gruyter. All rights reserved.

Keywords

Optimal EITC
Piecewise linear
Trapezoid

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1515/bejeap-2019-0421

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abstract = "In this paper we ask the following question: Is the optimal Earned Income Tax Credit (EITC) schedule a trapezoid, as widely used by policy-makers, or is it a triangle? We show that a trapezoid is optimal only when the wage distribution among the working poor is even with a discrete jump for higher wage groups. Since this pattern is not in line with the observed wage distributions of countries, we conclude that the optimal schedule is a triangle. Our simulations show that the use of a trapezoid implies a substantial loss in terms of Social Welfare.",

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The optimal earned income tax credit (EITC) schedule: A trapezoid or a triangle?

Abstract

Bibliographical note

Keywords

UN SDGs

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