Earned Income Tax Credit Policies

This chapter addresses policies directed towards low labour market attachment and low wages among certain groups of parents with children. It aims to evaluate the impact and the optimality of Earned Income Tax Credit policies specifically for lone parents. These policies have been at the centre of welfare-to-work reforms in the UK, US, and increasingly in continental Europe. They are in the class of ‘make work pay’ reforms that highlight a ‘work condition’ in welfare policy, aimed at balancing poverty reduction in families with children and employment incentives. Using estimates of structural models of labour supply responses at the extensive and intensive margin, and a comparison between UK and US reforms, the chapter poses the question, ‘can the existing tax credit systems we observe be considered optimal for reasonable social welfare weights?’