21.

3 Tax Policy to Promote Labor Supply:

The Earned Income Tax Credit . . . . . . . . . . . . . . . . . . . . . . 631
Background on the EITC 631
Impact of EITC on Labor Supply: Theory 633
Impact of EITC on Labor Supply: Evidence 634
Empirical Evidence: The Effect of the EITC on Single Mother Labor Supply 636
Summary of the Evidence 637
Application: EITC Reform 637

21.4 The Tax Treatment of Child Care and

Its Impact on Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . 639
The Tax Treatment of Child Care 639
Empirical Evidence: The Effect of Child Care Costs on Maternal
Labor Supply 640
Options for Resolving Tax Wedges 642
Comparing the Options 643

21.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 644

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645

CHAPTER 22 Taxes on Savings . . . . . . . . . . . . . . . . . . . . 647

22.1 Taxation and SavingsTheory and Evidence . . . . . . . . . . 648
Traditional Theory 648
Evidence: How Does the After-Tax Interest Rate Affect Savings? 653
Inflation and the Taxation of Savings 653

22.2 Alternative Models of Savings . . . . . . . . . . . . . . . . . . 655

Precautionary Savings Models 655
Self-Control Models 656
Empirical Evidence: Social Insurance and Personal Savings 657

22.3 Tax Incentives for Retirement Savings . . . . . . . . . . . . . 658

Available Tax Subsidies for Retirement Savings 659
Why Do Tax Subsidies Raise the Return to Savings? 660
Theoretical Effects of Tax-Subsidized Retirement Savings 662
Application: The Roth IRA 666
Implications of Alternative Models 668
Private vs. National Savings 669
Empirical Evidence: Estimating the Impact of Tax Incentives for Savings on
Savings Behavior 670
Evidence on Tax Incentives and Savings 671

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