Abstract

In-work credits grew in popularity worldwide during the late 1990s and 2000s as a means of reforming welfare systems in ways that could both encourage work and reduce poverty. This paper reviews the role of in-work tax credits in theUKand theUS, what is known and remains to be known about their impacts and distributional consequences, and the possibilities for reform. Evidence is clear that in-work credits reduce poverty and can encourage lone parents to work, but have minimal impacts, in aggregate, on second earners. Spending on in-work credits has grown in the UK, but there have been two major overhauls of the way these are structured so that, on current plans, the UK will not have an identifiable in-work credit by 2023. In the US, in-work assistance has grown in generosity and reach since the 1980s, thanks to broad political support for the Earned Income Tax Credit (EITC) and the (less-targeted) Child Tax Credit. Future debates in the UK should focus on the rise of in-work poverty, particularly amongst couples, with some needed focus on the design of in-work benefits, a debate here economic analysis and evidence should have a major role to play. In the US, the policy discussion should be aboutIn-work credits grew in popularity worldwide during the late 1990s and 2000s as a means of reforming welfare systems in ways that could both encourage work and reduce poverty. This paper reviews the role of in-work tax credits in the UK and theUS, what is known and remains to be known about their impacts.
and distributional consequences, and the possibilities for reform. Evidence is
clear that in-work credits reduce poverty and can encourage lone parents to
work, but have minimal impacts, in aggregate, on second earners. Spending on
in-work credits has grown in the UK, but there have been two major overhauls
of the way these are structured so that, on current plans, the UK will not
have an identifiable in-work credit by 2023. In the US, in-work assistance
has grown in generosity and reach since the 1980s, thanks to broad political
support for the Earned Income Tax Credit (EITC) and the (less-targeted) Child
Tax Credit. Future debates in the UK should focus on the rise of in-work
poverty, particularly amongst couples, with some needed focus on the design
of in-work benefits, a debate where economic analysis and evidence should
have a major role to play. In the US, the policy discussion should be about whether to increase substantially the EITC for those without children, and how
best to maintain or expand the credit’s generosity for those with children.

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