Get the directions for the Federal Income Tax or go to http://www.irs.gov to obtain the tables for the EITC for the current year. Explain how the program increases earnings for low-income workers and affects their incentives. Draw a curve for single workers, married workers filing jointly, and single parents showing how the EITC will vary with earnings. Why does the EITC encourage low-income workers to work? Use indifference curve analysis to show the income and substitution effects resulting from the EITC up to the point at which the maximum credit level of earnings is reached. How does the EITC phaseout affect tax rates paid for workers after they go past the level of earnings that pays the maximum credit under the EITC?
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