Earned Income Tax Credit

In recent policy discussions in the Netherlands, the Earned Income Tax Credit (EITC) has been put forward as an effective instrument to reduce the unemployment rate among low-skilled workers. Using the MIMIC model, this article shows that a targeted EITC at low incomes indeed seems effective in reducing unemployment. However, the targeting concept features decreasing returns. Furthermore, targeting typically harms the quantity and quality of labour supply. The EITC based on hourly wages, which has been proposed in the Netherlands, also suffers from serious problems related to tax design.