Reference no: EM132786009

The U.S. Earned Income Tax Credit (EITC) has been described as one of the most successful elements of U.S. antipoverty public policy, especially as it directs benefits towards the working poor. For the 2010 tax year, the EITC worked (approximately) as follows. Low-wage workers received additional income from the federal government, depending on how much they earned and how many children they had. Consider an individual with one child:

i. There was no credit if nothing was earned

ii. The credit equalled $0.34 per dollar earned, and peaked at around $3050, when the worker earned $8950

iii. It remained at $3050 until worker earned around $16,450

iv. It was phased out gradually, by $0.16 per dollar earned, until eliminated completely if the worker earned $35,535 or more per year

a) Assuming the worker faced no other taxes, graph the budget constraint associated with the EITC for a typical worker earning W per hour.

b) Analyze how the imposition of the EITC affects hours of labour supplied. Assuming that substitution effects are larger than income effect for the typical low-wage worker, does the credit necessarily increase hours of work for all those who are eligible? Why or why not?

c) Analyze the impact of the EITC on an individual labour force participation decision, assuming that the individual was not working in the absence of the EITC

d) The canadian EITC-type program, the Working Income Tax Benefit (WITB), provides no credit. The benefit is then calculated on the basis of "earnings minus $3000." What would happen to the work incentive effects of the EITC if a similar $3000 threshold was added to the EITC (holding everything else constant)?