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Consider the Earned Income Tax Credit policy described in lecture. All else equal, what is the implication for labor supply Answer

Consider the Earned Income Tax Credit policy described in lecture. All else equal, what is the implication for labor supply if:

  1. The EITC supplement rate increases from (about) 30% to 60%?The Earned Income Tax Credit (EITC) is a largely successful component of American labor and antipoverty policy, increasing the ability of workers in low-paying jobs to support themselves and their families. Work remains to improve the EITC’s effectiveness including expanding eligibility and increasing participation among those already eligible. If there is rise in the EITC supplement rate from 30% to 60%, then the labor supply will increase because they will have more tax credits. Lower income groups will have more disposable income and hence they would be encouraged to work more to get good earnings for their living.
  2. AnswerThe phase-out rate increases?Phase-out rate means there are different EITC rate at different income slabs. If there is rise in the phase-out rate then there will be fall in the labor supply because people having higher income have to pay higher taxes and hence their net wages will fall. It will discourage workers to work more.
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