2003 Earned Income Credit EIC (Formerly Earned Income Tax Credit

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					                              Problem: Earned Income Credit (EIC)


I. Marriage Incentives and Disincentives.

A. Consider two people each with $7,000 in earnings and 1 kid. If they remain single, their

     earnings are subsidized and their combined earned income credit is 2(2389) = $4778. If

     they marry, with $14,000 in earnings and 2 kids, they reach the EIC plateau and their EIC is

     $4204.

1. How much does the couple gain or lose in EIC by marrying? ______________________

2.   Does the EIC have an incentive, disincentive, or no effect on marriage? _____________


B. Consider one person with 2 kids and no earnings and one person with $14,000 in earnings.

     The person with the kids has no earnings and therefore receives no EIC. The other person

     has earnings over the maximum level for EIC and therefore also receives no credit as a single

     person. If they marry, they receive a credit of $4204.

1. How much does the couple gain or lose in EIC by marrying? ______________________

2. Does the EIC have an incentive, disincentive, or no effect on marriage? _____________


C. Consider one person with 2 kids and $14,000 in earnings and one person with no kids and no

     earnings. If they remain single, their combined EIC is 4204 + 0 = $4204. If they marry,

     their EIC is $4204.

1. How much does the couple gain or lose in EIC by marrying? ______________________

2.   Does the EIC have an incentive, disincentive, or no effect on marriage? _____________
II. Effects on Work. Answer each of the questions below with either work more, work less, no
     effect, or indeterminate.


A. Consider a couple with 2 kids and a total of $15,000 in earnings. Their EIC is $4142 and

     they are in the part of the EIC schedule where their credit is declining at a rate of 20% per

     additional dollar earned.

1. What is the income effect of the EIC on work? ____________________________________

2. What is the substitution effect of the EIC on work? ________________________________

3. What is the combined effect of the EIC on work? __________________________________


B. Consider a couple with 2 kids and a total of $6,000 in earnings. Their EIC is $2410 and they

     are in the part of the EIC schedule where their earnings are subsidized at a rate of 40% per

     additional dollar earned.

1.   What is the income effect of the EIC on work? ____________________________________

2. What is the substitution effect of the EIC on work? ________________________________

3. What is the combined effect of the EIC on work? __________________________________


C. Consider a couple with 2 kids and a total of $12,000 in earnings. Their EIC is $4204 and they

     are in the plateau of the EIC schedule.

1.   What is the income effect of the EIC on work? ___________________________________

2. What is the substitution effect of the EIC on work? ________________________________

3. What is the combined effect of the EIC on work? __________________________________