Pareto-Improving Tax Reforms and the Earned Income Tax Credit

Bierbrauer FJ, Boyer PC, Hansen E (2023)

Publication Type: Journal article

Publication year: 2023

Journal

Econometrica Econometric Society: Econometrica

Book Volume: 91

Pages Range: 1077-1103

Journal Issue: 3

DOI: 10.3982/ECTA18600

Abstract

We develop a new approach for the identification of Pareto-improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto-improving reform directions. A main insight is that “Two brackets are enough”: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto-improving. We also show how to check whether a given tax reform is Pareto-improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the United States in 1975. A robust finding is that, prior to the EITC, the U.S. tax-transfer system was not Pareto-efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto-improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto-improving.

Involved external institutions

École Polytechnique - Université Paris-Saclay FR France (FR) Universität zu Köln DE Germany (DE)

How to cite

APA:

Bierbrauer, F.J., Boyer, P.C., & Hansen, E. (2023). Pareto-Improving Tax Reforms and the Earned Income Tax Credit. Econometrica, 91(3), 1077-1103. https://doi.org/10.3982/ECTA18600

MLA:

Bierbrauer, Felix J., Pierre C. Boyer, and Emanuel Hansen. "Pareto-Improving Tax Reforms and the Earned Income Tax Credit." Econometrica 91.3 (2023): 1077-1103.

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