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Discussion Paper Discussion Paper 153 (2021.8)

[No.153] Comparing the Earned Income Tax Credit and Universal Basic Income in a Heterogeneous Agent Model

Ryo HASUMI
  Specially Appointed Fellow
Tetsuaki TAKANO
  Senior Economist

2021/08/24

<Abstract>

This study quantitatively evaluates two redistributive policies: the earned income tax credit (EITC) and universal basic income (UBI). We construct a continuous time heterogeneous agent model calibrated to the US economy and compare the expansion of the EITC with the introduction of UBI. Both policy changes encourage low-income households’ labor force participation and improve social welfare measured by consumption equivalents. Meanwhile, output declines as the policies discourage precautionary savings and reduce capital stock. Furthermore, they may widen wealth inequality because redistribution lowers income dispersion, and the marginal increase in the value of holding additional assets flattens out, as do consumption and savings.