Pareto-Improving Tax Reforms and the Earned Income Tax Credit
This paper provides necessary and suﬃcient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as suﬃcient 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 in-eﬃciency 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.