Earned income tax credit (EITC) Reading Assignment Today’s Questions What is the EITC in addition to how does it work

Earned income tax credit (EITC) Reading Assignment Today’s Questions What is the EITC in addition to how does it work www.phwiki.com

Earned income tax credit (EITC) Reading Assignment Today’s Questions What is the EITC in addition to how does it work

Ripley,, Midday Host has reference to this Academic Journal, PHwiki organized this Journal Earned income tax credit (EITC) Reading Assignment Greenstein, “The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor,” http://www.cbpp.org/7-19-05eic.htm Jason A. Levitis in addition to Nicholas Johnson, “Together, State Minimum Wages in addition to State Earned Income Tax Credits Make Work Pay,” http://www.cbpp.org/7-12-06sfp.pdf DeParle, Ch. 17: Money: Milwaukee, Summer 1999 Additional Sources A. Nagle in addition to N. Johnson, “A H in addition to Up: How State Income Tax Credits Help Working Families Escape Poverty In 2006,” Center as long as Budget in addition to Policy Priorities, www.cbpp.org S. Holt, “The Earned Income Tax Credit at Age 30: What We Know,” The Brookings Institution, February, 2006 http://www.brookings.edu/metro/pubs/20060209-Holt.pdf Citizens as long as Tax Justice, “The Hidden Entitlements,” 1996 http://www.ctj.org/hid-ent/part-3/part3-3.htm Ifie Okwuje in addition to Nicholas Johnson, “A RISING NUMBER OF STATE EARNED INCOME TAX CREDITS ARE HELPING WORKING FAMILIES ESCAPE POVERTY,” Center as long as Budget in addition to Policy Priorities, October 20, 2006 http://www.cbpp.org/10-12-06sfp.pdf

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Today’s Questions What is the EITC in addition to how does it work Who receives the EITC How large are the credits Which States supplement the credit Why is the EITC politically popular Will this popularity last- problems with the EITC What is the EITC in addition to how does it work A tax reduction in addition to wage supplement as long as low- in addition to moderate-income families Available to both single parent, two parent families, in addition to childless low-income workers Must work to be eligible A refundable credit, which means that if the credit amount is larger than a family’s income tax bill, the family receives a refund check equal to the difference. Usually claimed when the income tax return is filed. Can opt as long as equal monthly payments. Source: Tax Policy Center, Joint ef as long as t of the Urban Institute in addition to Brookings Institution http://www.taxpolicycenter.org/TaxFacts/TFDB/Content/PDF/eitc-parameters.pdf

Source: Together,State Minimum Wages in addition to State Earned Income Tax Credits Make Work Pay” Center as long as Budget in addition to Policy Priorities, http://www.cbpp.org/7-12-06sfp.pdf Inflation Adjustments Example A single parent with two children working nearly full-time-52 weeks per year at 38 hours per week-at the minimum wage of $5.15 per hour has an annual income of about $10,712. After subtracting $819 in federal payroll taxes in addition to adding the $4,536 federal EITC as long as which the family qualifies, the family’s cash income totals $14,429, or $1,813 below the 2006 poverty line as long as a family of three ($16,242). Source: Nagle in addition to Johnson, 2006.

Who Receives the EITC 5.4 million poor families with at able-bodied parents 3.3 million or 66 percent had at least one parent in the labor as long as ce Among poor families with children in which one or both parents worked anytime during the year, the parents worked at combined 44 weeks. About 75 percent of the families on welfare (TANF, SSI, or GA) had a parent working in 2004 Who Receives the EITC Source: Holt, 2006

Who Receives the EITC Source: Holt, 2006 Who Receives the EITC Who Receives the EITC Source: Holt, 2006

How large are the credits Source: Nagle in addition to Johnson, 2006 Source: Levitis in addition to Johnson, 2006 Source: Levitis in addition to Johnson, 2006

Which States supplement the credit Nineteen States (counting the District of Columbia as a State) supplement with Federal EITC. A campaign is being waged to convince the remaining States to do likewise. Source: Okwuje in addition to Johnson, 2006 Notes as long as previous table

Source: Nagle in addition to Johnson, 2006 Why is the EITC Politically Popular Encourages work More people enter the labor as long as ce Workers work more hours Reduces welfare costs Grogger concluded that the EITC “may be the single most important policy as long as explaining recent increases in work in addition to earnings in addition to declines in receipt of cash welfare assistance among female-headed families.” Source: Greenstein, 2005 Why is the EITC Politically Popular, Cont. Reduces poverty By 4.4 million in 2003 The poverty rate among children would be 1/4 higher without EITC Lifts more children out of poverty than any other program

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Child Credit a $1,000 tax credit per child on your tax return as long as children who are under 17 as of the end of the tax year Phased out as long as taxpayers with modified adjusted gross income reduced (but not below zero) by $50 as long as each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income exceeds the threshold amount. Threshold amounts: $110,000 in the case of a joint return $75,000 in the case of an unmarried individual $55,000 in the case of a married individual filing a separate return

Will this popularity last- problems with the EITC Fraud Overpayments to eligibles Fraudulent claims from ineligibles Nonparticipation Marriage penalty encourages cohabitation A two earner, two-child couple making $35,000 (with a 60/40% earnings split) can save $3,923 a year in federal income taxes by avoiding marriage (EITC: $4,400 vs. $476). Will this popularity last- problems with the EITC, cont. High cumulative marginal tax rates When earnings are in the phase-out range, the combined marginal tax rates as long as the may create a substantial work disincentive Federal income taxes 15% Payroll tax 7% EITC phase-out 21% Add a State income tax (3 to 6%) to this 43% marginal tax rate if relevant. Add 24% phase-out rate as long as Food Stamps. Cumulatively the marginal tax rate face by low-income Americans is in the range of 43- 73% ! Will this popularity last- problems with the EITC, cont. Subsidy to low-wage employers w0, L0 initial equilibrium w1, L0 equilibrium with EITC EITC = w0 – w1 Final equilbrium is at w2, L2 workers wages S S’ D w1 w0 L0 L2 w2

Will this popularity last- problems with the EITC, cont. The EITC is an entitlement! Proposed Improvements Increase tax credit as long as low-income workers without children Increase tax credit as long as families with three or more children Eliminate the marriage penalty Simplify filing procedures EITC Marriage Penalty Source: Iris J. Lav, Extending Marriage-Penalty Relief to Working Poor in addition to Near Poor Families, http://www.cbpp.org/6-10-99tax.htm

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