Poverty has long been an economic and political issue in the United States of America. Throughout the last century, several anti-poverty programs have been established. One of the most principal of these programs is the earned income tax credit, or EITC for short. The program has an interesting story and has created its own strong effect on the labor supply in the United States of America.
The earned income tax credit creates some changes on the classic labor supply model. In the graph to the right, the classic labor supply model is shown to view the changes that the EITC program has on individual work incentives. Here, the standard budget line is seen with the new slopes and indifference curves attached. EITC follows a pattern of going up a hill, traveling along a plateau, and then going back down the hill more slowly than it went up. The phase-in range at slope 3 depicts that for each additional hour, the worker earnings increase by the amount equal to the wage $w. With EITC, every dollar gained is surpluses with a subsidy of s.
Hence, there is a gain of $(1+s)*w. Then, for the plateau section at slope 2, each additional hour of work increases the earnings by wage $w but has no effect on any EITC payment. The slope here is simply –w. Lastly, for phase-out section seen at slope 1, earnings increase by $w for every additional hour, but the filer has every additional dollar reduced by $t. Therefore, net income for each hour is simply $(1-t). To complete the graph, point A is where the EITC is concluded, showing that the new budget line is equivalent with the original one. This is called the break-even point. The graph below demonstrates this with an example for a single filer with two children.
[...] Web Oct Laing, Derek. "Policy Application: The War on Poverty." Labor economics: introduction to classic and the new labor economics. New York: W.W. Norton & Co Print. Hotz, V Joseph, and John Karl Scholz. "The Earned Income Tax Credit." NBER Working Paper Series 8078 (2001): 10. Print. [8]"Policy Basics: State Earned Income Tax Credits Center on Budget and Policy Priorities." Center on Budget and Policy Priorities. N.p., n.d. Web Oct Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness”. 2010-07-24. [...]
[...] Web Oct Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness”. 2010-07-24. Laing, Derek. "Policy Application: The War on Poverty." Labor economics: introduction to classic and the new labor economics. New York: W.W. Norton & Co Print. Laing, Derek. "Policy Application: The War on Poverty." Labor economics: introduction to classic and the new labor economics. New York: W.W. Norton & Co Print. Ibid. Hotz, V Joseph, and John Karl Scholz. "The Earned Income Tax Credit." NBER Working Paper Series 8078 (2001): 21. [...]
[...] Labor Supply & Earned Income Tax Credit Poverty has long been an economic and political issue in the United States of America. Throughout the last century, several anti-poverty programs have been established. One of the most principal of these programs is the earned income tax credit, or EITC for short. The program has an interesting story and has created its own strong effect on the labor supply in the United States of America. The earned income tax credit creates some changes on the classic labor supply model. [...]
[...] The filer must have a social security number as well as an earned income. Also, they cannot be the qualifying child of another person and have investment income of less than $3,300 for the last twelve months. They must also be 25 years-old but less than 65 years-old when filing. For the 2013 filing year, their adjusted gross income must be less than $46,227 ($51,567 married filing jointly) with three or more qualifying children, $43,038 ($48,378 married filing jointly) with two qualifying children, $37,870 ($43,210 married filing jointly) with one qualifying child, $14,340 ($19,680 married filing jointly) with no qualifying children.[13] The current parameters for 2013 are found below. [...]
[...] Ibid. Greenstein, Robert. "Government Programs Kept Millions Out of Poverty." 2010. JPG file. Marr, Chuck, Jimmy Charite, and Chye-Ching Huang. " Earned Income Tax Credit Promotes Work, Encourages Children's Success at School, Research Finds Center on Budget and Policy Priorities." Center on Budget and Policy Priorities. N.p Apr Web Oct "Pr h\Lh³ŸCJOJ[14]QJ[15]^J[16]aJ h\LhPŠCJOJ[17]QJ[18]^J[19]aJ h\Lh`h\Lh`ÜCJOJ[20]QJ[21]^J[22]aJ h\Lh\LCJ0OJ[23]QJ[24]^J[25]aJ0eview of 2013 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates." Internal Revenue Service. N.p., n.d. Web Oct Ibid. [...]
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