Implementing the Earned Income Tax Credit: Shall Governments Design an Employee or an Employer-Based System.

This article analyzes the design of Earned Income Tax Credit (EITC) systems, comparing employee-based versus employer-based implementation using a labor market equilibrium model and social welfare analysis calibrated with Israeli data. It finds that while employer-based systems offer higher initial take-up due to automatic enrollment, they enable firms to exercise monopsony power that reduces the effective benefit to low-wage workers. Conversely, employee-based systems, which require recipients to apply individually, avoid employer rent-seeking and, despite slower take-up learning, tend to yield higher social welfare and greater net income for low-wage workers over time. Sensitivity analyses confirm the robustness of these results across variations in labor supply elasticity, firm market power, and take-up rates. The study highlights the importance of balancing take-up facilitation with labor market dynamics when designing EITC programs.