Abstract
In recent policy discussions in the Netherlands, the Earned Income Tax Credit (EITC) has been put forward as an instrument to reduce the unemployment rate among low-skilled workers. Using MIMIC, CPB's applied general equilibrium model for the Netherlands, this article discusses the economic impact of different forms of the EITC. The analysis reveals that moderately targeting the EITC to the unskilled makes the instrument more effective in reducing unemployment. The targeting concept features decreasing returns, however. Indeed, it may be counterproductive if the EITC is targeted at a very small income range. Furthermore, targeting the EITC to the low skilled induces adverse effects on the quality and quantity of labour supply because it raises the marginal tax burden on medium-income workers.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
REFERENCES
Alstott, A.L. (1994), 'The Earned Income Tax Credit and Some Fundamental Institutional Dilemmas of Tax-Transfer Integration,' National Tax Journal, 47, pp. 609-619.
Bovenberg, A.L., J.J. Graafland, and R.A. de Mooij (2000), 'Tax Reform and the Dutch Labor Market: An Applied General Equilibrium Approach', Journal of Public Economics (forthcoming).
Browning, E.K. (1995), 'Effects of the Earned Income Tax Credit on Income and Welfare,' National Tax Journal, 48, pp. 23-43.
CPB (1997), Economische verkenning voor de volgende kabinetsperiode.
Dickert, S., S. Houser, and J.K. Scholz (1995), 'The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation', in: J.M. Poterba (ed.), Tax Policy and the Economy (Vol. 9), pp. 1-50.
Drèze, J.H. and E. Malinvaud (1994), 'Growth and Employment: The Scope for a European Initiative,' European Economy 1, Brussels.
Eissa, N. and J.B. Liebman (1996), 'Labor Supply Response to the Earned Income Tax Credit', Quarterly Journal of Economics 111 (2), pp. 605-637.
Graafland. J.J. and R.A. de Mooij (1999), 'Fiscal Policy and the Labour Market: An AGE Analysis', Economic Modelling 16, pp. 189-219.
Hausman, J.A. (1981), 'Labour Supply', in: J.T. Poterba (ed.), How Taxes Affect Economic Behavior, pp. 27-72.
Haveman, R. (1996), 'Reducing Poverty while Increasing Employment: A Primer on Alternative Strategies and a Blueprint', OECD Economic Studies 26, Paris.
Koesveld, E.B.K. van (1998), 'Lastenverlichting met de Earned Income Tax Credit,' ESB 4146, pp. 264-268.
MaCurdy, T, D. Green, and H. Paarsch (1990), 'Assessing Empirical Approaches for Analyzing Taxes and Labour Supply,' Journal of Human Resources, 25, pp. 415-490.
Mooij, R.A. de (1999), 'Endogenizing (employ)ability in MIMIC,' Internal Memo I/99/06, CPB, The Hague.
Oers, F.M. van (1998), 'In Search of an Optimal EITC,' Internal Memo I/98/11, CPB, The Hague.
Parliament (1997), 'Belastingen in de 21e eeuw: Een verkenning,' The Hague.
Scholz, J.K. (1994), 'The Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness,' National Tax Journal, 47, pp. 63-85.
Scholz, J.K. (1996), 'In-Work Benefits in the United States: The Earned Income Tax Credit,' Economic Journal, 106, pp. 156-169.
Shapiro, I. and R. Greenstein (1993), 'Making Work Pay: The Unfinished Agenda,' Center on Budget and Policy Priorities, Washington D.C.
Snower, D.J., and G. de la Dehesa (1996), 'Unemployment Policy: Government Options for the Labour Market,' CEPR and Cambridge University Press, Cambridge.
Sørensen, P.B. (1997), 'Public Finance Solutions to the European Unemployment Problem,' Economic Policy, pp. 221-251.
Triest, R.K. (1990), 'The Effect of Income Taxation on Labour Supply in the United States,' Journal of Human Resources, 25-3, pp. 491-516.
Walker, R. and M. Wiseman (1997), 'The Possibility of a British Earned Income Tax Credit,' Fiscal Studies 18, pp. 401-425.
Yin, G.K., J.K. Scholz, J.B. Forman, and M.J. Mazur (1994), 'Improving the Delivery of Benefits to the Working Poor: Proposals to Reform the Earned Income Tax Credit Program,' American Journal of Tax Policy, 11, pp. 225-298.
Rights and permissions
About this article
Cite this article
van Oers, F.M., de Mooij, R.A., Graafland, J.J. et al. An Earned Income Tax Credit in the Netherlands: Simulations with the MIMIC Model. De Economist 148, 19–43 (2000). https://doi.org/10.1023/A:1003955012487
Issue Date:
DOI: https://doi.org/10.1023/A:1003955012487