Reducing poverty and increasing employment through the tax system – a comparative perspective on earned income tax credits

The purpose of this project is to analyze if earned income tax credits (EITCs) are able to reduce poverty and increase employment, and particularly under which conditions these two aims can be pursued simultaneously.

EITCs are tax instruments that promote income from work over income from the welfare state and their use have increased in many countries over the last two decades. Sweden, for example, introduced an EITC in 2007 (Jobbskatteavdrag), with the explicit aim to increase work-incentives. However, despite an increase in employment in many Western countries, poverty has increased or at best remained stable.

Does this mean that EITCs involve a trade-off between employment and poverty alleviation? To what extent are the two objectives of EITCs complementary? How should EITCs be organized to simultaneously boost employment and reduce poverty?

To examine these questions, two hypotheses will be tested: 1) the increased use of EITC has foremost increased low-income employment incapable of raising households above the poverty line, and 2) the increased use of EITC has reduced the relative value of out-of-work benefits and increased poverty among the unemployed.

The effects on poverty and employment are likely to depend on how EITCs are organized, for example if they target only low-income households, and the amount of the credit, but also how they relate to other parts of the welfare state, such as minimum wages and out-of-work benefits.

However, due to the lack of comparative measures, we have limited knowledge on the effects of EITCs beyond a handful of countries, and virtually no research on how they interrelate with other policies.

A key contribution of this project is to generate comparable indicators on the organization of EITCs for many countries, which will facilitate analyses that may be vital in order to effectively address observed increases in poverty in Europe.