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.
Bibliographical notePublisher Copyright:
- earned income tax credit
- welfare to work