Is EITC a negative tax?

[Touchdown]

I'm arguing with my yahoo co-worker in the next desk. He says that the IRS (not state) has a negative tax...the theory that if a family makes less than their collective EITC, then the IRS refunds them the difference, or...they pay nothing and get more money on top of that.

This seems like a catching that really big fish story to me. I've never heard of it.

Can anyone confirm or deny this?

[daytondem]

1. Here's how it works

http://www.irs.gov/individuals/article/0,,id=105014,00.html

[newyawker99]

9. Hi daytondem!!

Welcome to DU!! :toast:

[Shrek]

2. It's a tax credit

I'm not sure the term "negative tax" is all that accurate.

But a tax credit is applied to the tax liability as though it were paid in cash. Thus, if the amount of the credit exceeds the total liability, the difference is paid to the taxpayer.

[Yavin4]

3. The EITC Is A Replacement for Welfare

The argument against welfare was that it robbed the recipients of their incentive to work. Proponents of welfare argued that taking minimum wage jobs was actually a step down from welfare because of taxes and loss of healthcare benefits.

The compromise solution was the EITC which gives poor families a little subsidy while they work. The more work they do, the more they'll earn and not need the EITC. It's a fair and humane thing to do. Also, keep in mind that these families do pay taxes in other venues, like sales taxes.

Given that the government has destroyed welfare as a life-long benefit and given that the government keeps the minimum wage below subsistence level, the EITC is the least that they could do. Tell your Republican friend that the government wastes his taxes on a million other things other than the EITC.

I've got to hand it to the right-wing media. They have American working class and middle class people still angry at the poor even though welfare has been totally reformed. They still have people believing that all of their taxes and economic woes are due to the poor and not the wealthy. Unreal.

[gratuitous]

4. The EITC is a negative tax

The earned income tax credit for low-income workers with dependent children is a negative tax in the same way that the criminally low minimum wage constitutes a negative business subsidy.

[Skinner]

5. It's half-true, but misleading.

I think this is how it works...

The EITC provides an income tax credit to low-income working families. That income tax credit is refundable -- in other words, if your EITC credit is more than your income tax liability, you still get the whole credit.

For example: Imagine this situation (these numbers are totally made up, and are not based on any real formulas)...

Income tax liablity: $500
Refundable EITC: $700

Your *income* tax would be -$200. (ie: You get money from the government.) But there's a catch.

It is important to understand that when we say "income tax" that DOES NOT include payroll taxes (Social Security and Medicare). For lower-income workers, they usually pay much more in payroll taxes than federal income taxes.

So, let's change our example somewhat:

Income tax liability: $500
Refundable EITC: $700
Payroll Taxes: $1200

So, in reality, you would still be paying $1000 to the federal government. It's just that you're paying it in payroll taxes.

Here's the catch: The EITC is only refundable up to the amount of your payroll tax liablity. So nobody ever gets a larger credit than what they owe to the federal government in taxes.

The purpose of the EITC is so that low-income workers can get some relief from payroll taxes. They aren't getting free money from the government.

[salin]

6. Wasn't the EITC redone - and made more important

when there were changes made to the payroll deduction programs (SSI, Medicare) in the 1980s under Reagan? I believe that the amount paid in went up (very hard on low income wage earners), but that there was a "cap" so that no one kept paying on income above a certain amount (ala... taxable income from $1. to $79,999 (or there abouts is it 84,999) and NO payroll deduction on all income above $80,000 (or $85k?).

When they made this change, the hurt was so high and disproportionate on low income earners, if I recall correctly, that the EITC was expanded and solidified as a way of justifying the changes to SSI/Medicare deductions at the top income scales.

I have been very intrigued by how it is now sold as a "negative tax", while my memory was that it was increased as a way of lowering taxes (payroll deduction as described above) for higher wage earners. But now it is packaged as a special "boon" for low income earners.

Don't mind me, I am just scratching my head in the corner.

[Skinner]

8. I don't know the details.

All I know is that Clinton expanded the EITC significantly as part of his 1993 budget and tax package.

[AP]

7. It's a band-aid for a society which really rewards wealth

and gives very few chances to poor and working poor to get ahead.