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

Eitan Regev, Michel Strawczynski*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-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 languageAmerican English
Article number20190421
Pages (from-to)1-16
Number of pages17
JournalB.E. Journal of Economic Analysis and Policy
Volume20
Issue number3
DOIs
StatePublished - 1 Jul 2020

Bibliographical note

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

Keywords

  • Optimal EITC
  • Piecewise linear
  • Trapezoid

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