EITC - Earned Income Tax Credit (EITC) subsidy for...

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Earned Income Tax Credit (EITC) subsidy for low-income workers (for every $ a worker earns, the gov gives them $0.40, say…) tax credit - tax credit of $1 reduces your tax liability by $1 owe $1000 in taxes and have TC of $200, you only need to send the gov $800 EITC is refundable - if your tax credit exceeds your tax liability, the government will send you a check (tax rebate ) EITC history (Figure 21.4) enacted in 1975 major expansions in 1990 and 1993 federal government spending on EITC (2004) = $34.6 billion federal government spending on TANF (2004)= $25.8 billion EITC is now “the nation’s single largest cash anti-poverty program” (619) Eligibility #1) have to have earned income #2) can’t have too much income married couple with two children- receive no credit when earned income reaches about $40,000 #3) amount of tax credit depends on family structure phase-in rate max credit phase-out rate two or more children 40% $4,800 20% one child 34% $2,900 16% no children 7.65% $400 7.65% •rough, round numbers from recent years •all dollar amounts in the EITC are indexed to increase automatically each year with wage income in the economy
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How does EITC work? EX) a family with two children (rough, round numbers from recent years) earn <= $12,000 gov gives you $0.40 for every $1 you earn max credit= $4,800 ($12,000*0.40) earn between $12,000 and $16,000 receive max credit= $4,800 earn between $16,000 and $40,000 max credit is reduced by $0.20 for every $1 you earn calculate tax credit in phase-out region→ $4,800-(0.2)×[earned income – $16,000] calculating the implicit tax rate in the phase-out region of the EITC program Consider an EITC program in which the maximum credit is $3000. An individual who has earned income between $7000 and $12,000 receives the maximum credit (ie- someone who has earned income of $10,000 will have total income of $13,000 because of the tax credit). An individual who has earned income of $16,000 has total income of $17,000. What is the implicit tax rate that the individual who has earned income of $16,000 faces? implicit tax rate =[1-
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EITC - Earned Income Tax Credit (EITC) subsidy for...

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