earned income tax credit eitc l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Earned income tax credit (EITC) PowerPoint Presentation
Download Presentation
Earned income tax credit (EITC)

Loading in 2 Seconds...

play fullscreen
1 / 35

Earned income tax credit (EITC) - PowerPoint PPT Presentation


  • 325 Views
  • Uploaded on

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 DeParle, Ch. 17: Money: Milwaukee, Summer 1999. Additional EITC Links.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Earned income tax credit (EITC)' - Gideon


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
reading assignment
Reading Assignment
  • Greenstein, “The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor,” http://www.cbpp.org/7-19-05eic.htm
  • DeParle, Ch. 17: Money: Milwaukee, Summer 1999
additional eitc links
Additional EITC Links
  • IRS EITC information: http://www.irs.gov/individuals/article/0,,id=96406,00.html
  • Thresholds and maximum credits: http://www.irs.gov/individuals/article/0,,id=150513,00.html
  • Q & As: http://www.irs.gov/individuals/article/0,,id=96466,00.html
  • EITC’s reach: http://www.taxpolicycenter.org/publications/url.cfm?ID=1000467
today s questions
Today’s Questions
  • What is the EITC and 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 and how does it work
What is the EITC and how does it work?
  • A tax reduction and wage supplement for low- and moderate-income families
  • Available to both single parent, two parent families, and 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 for equal monthly payments.
slide7

Source: Center for Budget and Policy Priorities, http://www.cbpp.org/cms/?fa=view&id=2505

slide8

ARRA and the Earned Income Tax Credit

  • The American Recovery and Reinvestment Act (ARRA) provides a temporary increase in the earned income tax credit (EITC) for taxpayers with three or more qualifying children. The maximum EITC for this new category is $5,657. ARRA also increases the beginning point of the phaseout range for the credit for all married couples filing a joint return, regardless of the number of children. These changes apply to 2009 and 2010 tax returns.
  • Source: irs.gov
example
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 $7.25 per hour has an annual income of about $14,326. After subtracting $1,095 in federal payroll taxes and adding the $4,842 federal EITC for which the family qualifies, the family’s cash income totals $18,054, or $708 above the 2008 poverty line for a family of three ($17,346).
who receives the eitc
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 force
    • 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 eitc12
Who Receives the EITC?

Source: Holt, 2006

who receives the eitc13
Who Receives the EITC?

Source: Holt, 2006

who receives the eitc15
Who Receives the EITC?

Source: Holt, 2006

how large are the credits
How large are the credits?

Source: Nagle and Johnson, 2006

which states supplement the credit
Which States supplement the credit?
  • 24 States (counting the District of Columbia as a State) supplement with Federal EITC.
  • See http://www.cbpp.org/cms/index.cfm?fa=view&id=462 for details.
why is the eitc politically popular
Why is the EITC Politically Popular?
  • Encourages work
    • More people enter the labor force
    • Workers work more hours
  • Reduces welfare costs
    • Grogger concluded that the EITC “may be the single most important policy for explaining recent increases in work and earnings and declines in receipt of cash welfare assistance among female-headed families.”

Source: Greenstein, 2005

why is the eitc politically popular cont
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
child credit
Child Credit
  • a $1,000 tax credit per child on your tax return for children who are under 17 as of the end of the tax year
    • Phased out for taxpayers with modified adjusted gross income
    • reduced (but not below zero) by $50 for 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
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
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 for 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 for 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 cont27
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

wages

S

S’

w0

w2

w1

D

L0

L2

workers

proposed improvements
Proposed Improvements
  • Increase tax credit for low-income workers without children
  • Increase tax credit for families with three or more children 
  • Eliminate the marriage penalty
  • Simplify filing procedures
eitc marriage penalty
EITC Marriage Penalty

Source: Iris J. Lav, Extending Marriage-Penalty Relief to Working Poor and Near Poor Families, http://www.cbpp.org/6-10-99tax.htm

labor force participation for individuals cont budget constraints
labor force participation for individuals, cont.Budget Constraints

Y

  • Budget constraint ADE

The individual has higher nonwage income (Z2 = AD) and the same market wage rate

E

F

  • Budget constraint ADF

The individual has higher nonwage income (Z2 = BD) but a lower market wage (DF is less steep).

C

D

Z2

Z1

B

A

O

leisure hours

hours of work

slide33

labor force participation for individuals, cont.Individual Chooses To Work

U3

Income (Y)

U2

Utility is maximized at D where MRCS = w

U1

C

D

Y1

B

A

L1

0 Leisure hours

(maximum work hours)

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

slide34

labor force participation for individuals, cont.Individual ChoosesNotTo Work when nonwage income increases

Income (Y)

Utility is maximized at F where:

MRCS = w = reservation wage

F is a corner solution

Work hours fall from L1 to 0

(pure income effect: Yl)

Un

U2

U1

C

F

D

Y1

B

A

0 Leisure hours

(maximum work hours)

L1

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

slide35

labor force participation for individuals, cont.Individual Chooses To Work Less as Wage rate falls

U3

  • Utility is maximized at E
  • Hours worked falls from L1 to L2

Income (Y)

U2

U1

C

  • income effect: L1 -LY
  • Substitution effect L2 - LY

D

Y1

Y2

E

B

A

LY

L1

L2

0 Work Hours

(maximum leisure hours)

0 Leisure hours

(maximum work hours)

Leisure hours (l)

Work hours (L)