Earned income tax credit
From Free net encyclopedia
The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. Enacted in 1975, the then very small EITC was expanded in 1986, 1990, 1993, and 2001 with each major tax bill, regardless of whether the tax bill in general raised taxes (1990), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States, and enjoys broad bipartisan support.
Other countries with EITCs include Britain, Canada, Ireland, New Zealand, Finland, Belgium, France, the Netherlands and Denmark. In some cases, these are small (the maximum EITC in Finland is 290 Euros), but others are even larger than the US EITC (the UK EITC is worth up to 6150 Euros).
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Structure
The EITC in the United States is characterized by a unique three-stage structure that consists of a phase-in range in which the credit increases as earnings increase, a plateau range in which the maximum credit has been reached and further earnings do not affect it, and a phase-out range in which the credit decreases as earnings increase. Currently, for a family with two dependent children, the credit is equal to 40 percent of the first $10,750 earned, plateaus at a maximum credit of $4,400, begins to phase-out when earnings increase beyond approximately $15,000, and reaches zero when earnings pass approximately $35,000. For filers using the Married Filing Jointly status, the phase-out thresholds are increased by $2000. For a family with one dependent child, the structure is similar but has a phase-in rate of 34 percent and a maximum credit of $2,604. For those filing without dependents, there is a small credit of 7.65 percent of earnings with a maximum of $380, which covers the employee's portion of the social security tax. All dollar amounts are now indexed to inflation.
In addition to the federal EITC, 11 states have their own refundable EITCs. These state plans mimic the federal EITC’s structure on a smaller scale, as individuals receive a state credit equal to a fixed percentage – between 15 and 30 percent depending on the state – of what they received from the IRS. Furthermore, small local EITC’s have been enacted in New York City, Montgomery County in Maryland, and San Francisco.
Impact
The EITC is the largest poverty reduction program in the country. Due to its structure, it is particularly effective in targeting relief only to low-income families. Almost 21 million families received more than 36 billion dollars in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line. Since the poverty line can be a watermark for eligibility for state and federal benefits, taxpayers receiving the EITC are less eligible for entitlements, and so the EITC reduces entitlement spending. Economists suggest that every increased dollar received by low and moderate-income families has a multiplier effect of between 1.5 to 2 times the original amount, in terms of its impact on the local economy and how much money is spent inand around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively gaining as much as $18.4 billion.
Research shows that the EITC has also boosted labor force participation, particularly by low-educated single mothers. However, there is also evidence that this increase in labor supply has led to a fall in hourly wages among those eligible for the credit.
Uncollected tax credits
Millions of families who are eligible for the tax credit do not receive it, leaving billions of additional tax credit dollars uncollected. Research by the General Accounting Office (GAO) and IRS indicates that between 15% and 25% of households who are entitled to the EITC do not claim their credit, or between 3.5 million and 7 million households.
The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion, or more than $12 billion if the unclaimed rate is 25%.
See also
- Taxation in the United States
- Basic income
- Speenhamland
- Guaranteed minimum income
- Negative income tax
External links
- New Research Findings on the Effects of the Earned Income Tax Credit, Center on Budget and Policy Priorities, March 11, 1998
- The National Tax Coalition
- Internal Revenue Service Publication 596 - Earned Income Credit
- The Earned Income Tax Credit (EITC): Percentage of Total Tax Returns and Credit Amount by State a Congressional Research Service (CRS) Report