No abstract

This article presents the earned income tax credit (EITC), an instrument that consists in topping up lower-paid workers' earnings with cash transfers. As a social policy, it has the advantage of being an effective mechanism for tackling inequality that does not greatly interfere with the trade-off between leisure and work but encourages labour market participation and formalization, cuts poverty and reduces the stigma attached to being a social programme beneficiary. This instrument is offered for two purposes: (i) as an actual policy option and (ii) as a benchmark for contrasting the potential cost-effectiveness of any other public policy intended to reduce inequality. The paper applies a genetic algorithm for numerical optimization to evaluate the parameters that optimally minimize income inequality and shows that, for example, spending 5.000 million dollars a year would reduce the Gini by between 4.7 and 6.1 points, which is more than the entire reduction recorded between 1990 and 2015.

El autor agradece los comentarios realizados por Harald Beyer, Loreto Cox, Andrés Hernando y Slaven Razmilic, así como los hechos por los árbitros anónimos de Estudios Públicos.