Question: Suppose that as a policy maker, you have three options for expanding the Earned Income Tax Credit (EITC) using a given increase in your budget.

Suppose that as a policy maker, you have three options for expanding the Earned Income Tax Credit (EITC) using a given increase in your budget. Option 1: Increase the compensation rate in the phase-in portion of the EITC schedule. Option 2: Increase the maximum tax credit a person can receive. Option 3: Lower the rate of reduction in the phase-out portion of the EITC schedule. (a) Suppose that the goal of your agency is to increase the size of the labor force. Which option would meet this goal in the most cost-effective manner? Explain. (b) Suppose that you chose option 2. Explain in terms of income and substitution effects how your choice would affect someone who is on the phase-out portion of the EITC schedule.

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