Discussion paper

DP14853 Pareto-improving tax reforms and the Earned Income Tax Credit

This paper provides necessary and suffcient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as suffcient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an inefficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.

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Citation

Bierbrauer, F, P Boyer and E Hansen (2020), ‘DP14853 Pareto-improving tax reforms and the Earned Income Tax Credit‘, CEPR Discussion Paper No. 14853. CEPR Press, Paris & London. https://cepr.org/publications/dp14853