A problem with the earned income tax credit is that as your income increases you get less of it which creates a high effective marginal tax rate (especially when combined with other means tested government programs) which discourages people from leaving the lower working socioeconomic class.
Of course. I didn’t mean to imply that the EITC was perfect; the only perfect redistribution program is going to be uninfluencable lump sum transfers. My understanding was that wage subsidies were found to be pretty effective at boosting poor people’s spending power without doing too much to incrementally discourage work.
A problem with the earned income tax credit is that as your income increases you get less of it which creates a high effective marginal tax rate (especially when combined with other means tested government programs) which discourages people from leaving the lower working socioeconomic class.
Of course. I didn’t mean to imply that the EITC was perfect; the only perfect redistribution program is going to be uninfluencable lump sum transfers. My understanding was that wage subsidies were found to be pretty effective at boosting poor people’s spending power without doing too much to incrementally discourage work.
Even lump sun transfers reduce incentives to work because as most people get richer they prefer to work less.
Is this necessarily a bad thing?
Imagine a utopian future. How much time would you expect people to spend working, more or less than they do currently?
It might not be bad, but it does result in their wealth being increased by less than the lump sum amount received.
This may be of interest: http://harrisschool.uchicago.edu/about/publications/working-papers/pdf/wp_07_20.pdf It describes how the EITC works and discusses the empirical evidence on its effects, including labor supply effects. I haven’t read it, so I can’t vouch for it, but it looks interesting.
This links to some other research: http://modeledbehavior.com/2010/10/26/why-the-minimum-wage-should-go/
This says that the EITC doesn’t seem to ever reduce the number of hours people work.