Research Paper on "Earned Income Tax Credit"

Research Paper 5 pages (1634 words) Sources: 5

[EXCERPT] . . . .

Earned Income Tax Credit

Earned Income Tax

The earned income credit is a refundable tax credit that working families and individuals with lower income can use. The amount of the credit is a variable one, and is calculated in accordance with the level of income and on the number of dependents individuals support. In some cases, the tax credit can provide a higher level of the refunded tax in comparison with the level of the tax paid by families and individuals through withholding.

There are several requirements that individuals must meet in order to be considered qualified for receiving the EITC. For example, the individual filing for the credit must be older than the qualifying child. The qualifying child must be under the age of 18 (or 24 if enrolled full time in college) and have a social security number and fall into one of the categories of dependency: being the son or daughter of the tax payer, an adopted child, stepchild or foster child or another descendant living with the tax payer, like a grandchild whom the tax payer has custody of. Disabled children of any age are considered to be qualified dependents as well. The child must live with the tax payer for more than half the year and to file the tax payer must be the only individual requesting the credit in a given tax year. In other words, only one parent and one household can claim the credit unless special shared residency requirements are met.

There are numerous situations that are difficult to resolve, when children are claimed by several individuals. In certain cases, the children are claimed by parents and non-parents related to them. These rules are set forth to try to prevent individuals that want to take advantage of the credit whether or not they should (IRS, 2010).

Regarding the shared residence requirement, it refers to the fact that the individual must live with the children on U.S. territory for more than half the year. Temporary residences are allowed also. However, there are several exceptions from this rule. This usually refers to military personnel that are sent on duty, or periods of school, vacation, and others.

The earned income of the claimant must be provided by the following sources: wages, salaries, commissions, net earnings from self-employment, gross income of statutory employees, taxable benefits of retired or disability individuals, and others.

The earned income tax credit is an important instrument developed by the government in order to help families and individuals to increase their income (the Piton Foundation, 2008). According to the IRS website, "The Earned Income Tax Credit also called EITC... is a credit for people who earn low-to-moderate incomes...EITC can reduce your taxes, and can mean a refund. In simple terms, working families and individuals keep more of what they earn" (IRS, 2010).

The EITC is the subject of several campaigns implemented by various organizations in order to increase the number of eligible families. Such an organization is represented by the Piton Foundation.Their efforts are oriented towards several directions. For example, such strategies combine the activity of certain non-profit organizations that are involved in the communities that qualify for such tax credits, they try to convince employers in helping their employees benefit from these tax credits, and they invest in advertising campaigns intended to increase the awareness level about EITC.

The benefits of the EITC are acknowledged by individuals, organizations, and by the government. Given the economic effects of the crisis on companies and individuals, it was expected that the poverty level in the U.S. would increase. However, it seems that the poverty level did not increase, because of benefits like the Child Tax Credit, the Making Work Pay tax credit, and the earned income tax credit (Dougherty, 2011). According to certain surveys, approximately 8 million people are kept out of poverty through such credits.

Although the EITC is intended to help families and individuals with lower incomes and to encourage work, it seems that the tax credit might lead to reduced wages. In these cases, the intended transfer is directed towards employers. The transfer is made through reduced wages (Rothstein, 2009). In other words, the EITC affects hourly wages. The EITC is intended to increase income distribution towards workers that benefit from lower wages, and to increase the participation rates of the workforce (Leigh, 2005). As a result of the workforce increasing, the wages are likely to reduce. These wages reduction affects both eligible and non-eligible workers for EITC. Therefore, non-eligible workers are disadvantages by the EITC level. Several studies in the field have revealed the fact that the increase of the EITC level leads to reduction of hourly wages for eligible and non-eligible workers. Despite the fact that there is a national minimum wage, a reduction in wages is a serious problem for many American families who struggle everyday to survive.

Studies conducted by public or private organizations have identified important benefits of the EITC. For example, the EITC has been observed to significantly increase employment among the proportion of single mothers and "lifts more children out of poverty than any other program" (Greenstein, 2000). One study suggests that single mothers' employment increased by as much as 2.8 percentage points (Wu, 2005). This is probably due to the balancing out of the tax credit compared to welfare benefits. If mothers could keep more of their income they would need less of the federal welfare program money to support their families. By increasing the number of employed individuals, the U.S. can benefit from maintaining the economic growth rates without inflationary pressures (Greenstein, 2000). Given these results of the strategy, the government decided that the measure should be expanded to families with three or more children. Based on thorough research, it has been observed that a higher level of EITC for such families is intended to improve the welfare reforms developed and implemented in the U.S.

However, not many specialists in the field agree with the increases of the EITC. They consider that the U.S. welfare system is not likely to benefit from significant improvements as a result of the EITC increase (Browning, 1995). In their argument the EITC increase leads to extended welfare payments to numerous families that do not need such support through the receipt of the credit dollars, the payouts made from the IRS to fund the EITC. In addition to this, the policy is expected to lead to overall marginal tax rates significant increases. The "EITC operates like an earnings subsidy with a negative marginal tax rate of 40% for those with earnings below $8,425, and then is analogous to a lump sum transfer for those with earnings in the plateau range… [it is] more accurately likened to an NIT for the entire range of earnings between $8,425 and $27,000. It is only at the bottom third of the income range covered that the EITC is an earnings subsidy" (Browning, 1995). However, the effects of the policy on different types of families with various income levels are different. Therefore, it cannot be clearly decided whether the expansion of the policy is likely to produce significantly better results. In certain cases, the expansion of the EITC can create disadvantages.

Its advisable for the government to develop campaigns intended to increase the awareness level for EITC. This is because the IRS has stated that in numerous cases the EITC benefits are not claimed by the eligible workers (Grass, 2011). Examples of low-cost ideas for raising awarenesses are posting information to the IRS website homepage. Tax payers often visit the page during tax time. Providing email notices to tax preparers is another way to get the word out without a lot of investment. A lot of taxpayers use software to prepare their own taxes. Software companies usually design to search for credits… READ MORE

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