Tax Credit Expansion
Scaling-up tax credit programs to reach a broader set of displaced and low-wage workers through the existing tax code.
What it is:
Tax credit expansion uses the existing tax system to deliver targeted financial support to workers and families. Governments can design credits to serve different purposes: earned income credits act as wage subsidies that make low-paid work more financially viable, child tax credits provide per-child payments that reduce family poverty, and training credits can offset the costs of acquiring new skills. These can be scaled by adjusting their generosity, broadening income eligibility, or making them fully refundable so that even those who owe no tax receive the full benefit.
Tax credit expansion has several practical advantages. Credits flow through established tax infrastructure, so they can be scaled up without building new bureaucracies — as the US demonstrated when it temporarily expanded the Child Tax Credit in 2021 and delivered monthly payments to tens of millions of families within weeks. Earned income credits are particularly relevant in a labor market where AI is compressing wages, because they close the gap between what the market pays and what workers need to sustain a household, preserving the incentive to accept available work even at lower pay.
The challenge:
The main limitation is that credits tied to earnings do nothing for people who cannot find work at all. This could become a serious gap if AI displacement is prolonged rather than transitional. Delivery through annual tax filing also creates timing problems, since workers who lose income mid-year may wait months for support unless credits are converted to advance payments, which introduces overpayment risks. There is also a tension between targeting and simplicity: the more precisely a credit is tailored to reach specific groups, the more complex the eligibility rules become, increasing compliance burdens and improper payment risks.
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Real-world precedents:
The Earned Income Tax Credit (EITC), established in 1975, is the U.S.'s largest anti-poverty program for working families, lifting an estimated 5.6 million people out of poverty in 2018. EITC raises employment levels and earnings for recipients while improving child outcomes over time.
The 2021 expansion of the Child Tax Credit, which made the credit fully refundable and paid it out in monthly installments, provides a powerful recent precedent. Combined with other pandemic relief, this cut monthly child poverty by approximately 40% in the first month of payments; the CTC alone lifted 3 million children from poverty, a 25% reduction.
The UK's Working Tax Credit (2003–2025), functioned as a direct payment administered through the tax authority rather than a true tax credit. Research by the Institute for Fiscal Studies found that the credit significantly increased employment among lone parents, though it had minimal effect on second earners in couples. The program was eventually replaced by Universal Credit, in part because its annual income assessment created persistent overpayment and clawback problems.
South Korea's Earned Income Tax Credit, the first EITC in Asia, is a refundable tax credit administered through the National Tax Service. An OECD review found that one in four Korean households now receives it, as well as positive effects on employment and working hours, particularly among those not receiving other social assistance. However, their analysis notes that South Korea continues to have one of the highest rates of in-work poverty among member countries, suggesting that the EITC’s benefit levels and phase-out thresholds remain too limited to fully address the scale of the problem.