Should we subsidize work? Welfare reform, the earned income tax credit and optimal transfers

During the 1990s, US income transfer and tax policies shifted towards trying to encourage work among low-income families. Optimal tax theory, however, suggests that work subsidies are usually an inefficient way to raise the incomes of poor families unless the work effort of recipients has external b...

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Bibliographic Details
Published in:International tax and public finance 2007-06, Vol.14 (3), p.327-343
Main Authors: Acs, Gregory, Toder, Eric
Format: Article
Language:English
Subjects:
Consumption
Diminishing marginal utility
Earned income
Earned income tax credit
Earnings
Economic theory
Employment
Endowment
External benefits
Government subsidies
Income distribution
Income redistribution
Income tax
Income taxes
Labor economics
Low income groups
Occupations
Optimal taxation
Optimal taxes and transfers
Public finance
Public good
Public policy
Redistributive taxation
Skills
Social security
Studies
Subsidies
Tax credits
Tax rates
Tax reform
Transfer payments
U.S.A
Voters
Welfare reform
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Summary:During the 1990s, US income transfer and tax policies shifted towards trying to encourage work among low-income families. Optimal tax theory, however, suggests that work subsidies are usually an inefficient way to raise the incomes of poor families unless the work effort of recipients has external benefits and/or tax payer/voters prefer redistributing income to the working poor rather than the idle poor. This paper discusses the conditions under which work subsidies may be economically efficient and assesses empirical evidence that suggests that welfare reform and expansions of the EITC have increased work effort among low income families, but is inconclusive about whether the policy shift has enabled them to advance beyond entry-level jobs or benefited their children. Copyright Springer Science+Business Media, LLC 2007
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-006-9010-z