Friday, November 4, 2011

EITC is Good

Means tested welfare and EITC should be designed in a way that an incentive is created to get out of the safety net.

Say a single mom is on SNAP, section 8 housing, and Medicaid. If I were to pay her 30k, she would be worse off because she would lose access to all those means tested programs. If I were to pay her 36k she might not be so bad off. The only problem is she is inexperienced and not worth 36k. What if the government ponied up that 6k (but also didn't have to pay 6k worth of means tested benefits for a net cost of 0).

All of the sudden she has an incentive to get off welfare over an above her ethic, and two years later may even be making 50k because she's got some good experience under her belt.

(the numbers are not exact, but you get the idea. A good EITC would soften the implied marginal tax rates that are the result of losing access to a means tested benefit). It is a really bad policy to get rid of EITC instead of just streamlining it and the myriad means tested programs.

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