Comparing the earned income tax credit and universal basic income in a heterogeneous agent model

Ryo Hasumi and Tetsuaki Takano

Structural Change and Economic Dynamics, 2025, vol. 73, issue C, 238-247

Abstract: This study quantitatively evaluates two redistributive policies: the earned income tax credit (EITC) and universal basic income (UBI). We construct a continuous time heterogeneous agent model calibrated to the US economy and compare the expansion of the EITC with the introduction of UBI. Both policy changes encourage low-income households’ labor force participation and improve social welfare measured by consumption equivalents. Meanwhile, output declines as the policies discourage precautionary savings and reduce capital stock. Furthermore, they may widen wealth inequality because redistribution lowers income dispersion, and the marginal increase in the value of holding additional assets flattens out, as do consumption and savings.

Keywords: Mean field game; Heterogeneous agents; EITC; Universal basic income; Labor supply (search for similar items in EconPapers)
JEL-codes: E02 E62 H24 I38 J22 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:73:y:2025:i:c:p:238-247

DOI: 10.1016/j.strueco.2025.01.002

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