Abstract:

Governments implementing an Earned Income Tax Credit (EITC) aim at increasing Working Poor’s propensity to work, in order to alleviate poverty. If this goal is attained in the long-run: shall the optimal EITC increase or decrease? We deal with this question using simulations with endogenous participation and intensive margin elasticities. When the participation elasticity is endogenous, the optimal long-run EITC decreases. However, if we add endogenous intensive margin elasticity, the optimal EITC increases because the Working Poor works harder, making the EITC cheaper at the margin. The optimal increasing long-run EITC pattern holds also with a constant elasticity of labor.