The Possibility of a British Earned Income Tax Credit

Abstract The possibility of an earned income tax credit, based on the US model, is currently high up the British political agenda. This paper examines the strengths and weaknesses of the current British system of in‐work benefits, before reviewing the effectiveness of the US Earned Income Tax Credit (EITC) scheme. The British and US systems are then directly compared in terms of the net income delivered and the effective tax rate (net benefit deduction rate). Although the evidence in favour of a US‐style EITC is weak, two possible variants are considered. The paper concludes that the only future for an EITC is probably as a partial scheme, linked to the amalgamation of in‐work and out‐of‐work benefits, which removes wage subsidisation from the sphere of social security by means of a semi‐individualised tax credit. Even so, the same goals could be achieved through the benefit system. JEL classification: H24, I38.