In recent policy discussions in the Netherlands, the
Earned Income Tax Credit (EITC) has been put forward
as an effective instrument to reduce the unemployment
rate among low-skilled workers. Using the MIMIC
model, this article shows that a targeted EITC at low
incomes indeed seems effective in reducing unemployment.
However, the targeting concept features
decreasing returns. Furthermore, targeting typically
harms the quantity and quality of labour supply. The
EITC based on hourly wages, which has been proposed
in the Netherlands, also suffers from serious problems
related to tax design
