The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?

Regev Eitan and Michel Strawczynski
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Regev Eitan: Hebrew University of Jerusalem, Economics, Jerusalem, Israel

The B.E. Journal of Economic Analysis & Policy, 2020, vol. 20, issue 3, 16

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.

Keywords: optimal EITC; trapezoid; piecewise linear (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/bejeap-2019-0421

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