An Earned Income Tax Credit in the Netherlands: Simulations with the MIMIC Model

In recent policy discussions in the Netherlands, the Earned Income Tax Credit (EITC) has been put forward as an instrument to reduce the unemployment rate among low-skilled workers. Using MIMIC, CPB's applied general equilibrium model for the Netherlands, this article discusses the economic impact of different forms of the EITC. The analysis reveals that moderately targeting the EITC to the unskilled makes the instrument more effective in reducing unemployment. The targeting concept features decreasing returns, however. Indeed, it may be counterproductive if the EITC is targeted at a very small income range. Furthermore, targeting the EITC to the low skilled induces adverse effects on the quality and quantity of labour supply because it raises the marginal tax burden on medium-income workers.