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Designing a Work-Friendly Tax System : Options and Trade-Offs

The federal tax system often imposes its highest effective marginal tax rates on low- and moderate-income individuals. This paper suggests several ways to reduce those high effective marginal rates but illuminates the large trade-offs involved. One approach would replace the current earned income credit (EIC) with a $2,000 EIC for working parents and a refundable $1,000 per child tax credit. A more comprehensive approach would integrate the individual income and Social Security tax systems into a single tax system with just two tax rates and a refundable $2,000 EIC for working parents and a $1,000 universal grant for every person.

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