The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?
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AbstractIn 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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2018 ◽
Vol 17
(2)
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pp. 377-410
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2012 ◽
Vol 44
(16)
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pp. 2035-2050
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