Wednesday, February 11, 2015

data on EITC (2014)

The EITC is a tax credit for low-income workers, particularly for heads-of-household [HoH] or married folks with kids. Eligibility for and the amount of the credit are based solely on household composition and earned income. (The latter ignores non-reported income-- at least non-cash benefits from govt, savings/wealth, etc. This arrangement also ignores costs of living and other contexts [e.g., big medical expenses].).

There are three variables to any welfare program. EITC has another wrinkle which adds a 4th dimension.

1.) The credit kicks in with every dollar earned-- for those with no children (about $7.66 cents per $100 earned); and for those with children (1 child = $34; 2 children = $40 and 3 or more children = $45). 

The credit is designed to help those with lower incomes who are trying to raise a family. But it also serves to *incentivize* work, in this range, by subsidizing net wages through the tax code. (And contra the minimum wage, it accomplishes this without making workers more expensive-- and thus less attractive-- to hire.) 

2.) EITC's added wrinkle: The credit increases to a maximum that plateaus in certain income ranges: 
-with no kids, a $496 credit for "income" between $6,500 and $8,150 for HoH (or $13,550 if married)
-with 1 kid, a $3,305 credit for income between $9,700-17,800 (or $23,250 if married)
-with 2 kids, $5,460 between $13,650 and $17,800 (or $23,250 if married)
-with 3+ kids, $6,143 between $13,650 and $17,800 (or $23,250 if married)

3.) Then the credit is reduced through a "benefit reduction rate" (BRR); as earned income rises, there is less need for assistance. The BRR is an implied marginal tax rate (MTR)-- your (total) income is reduced to the extent that B is reduced as you earn more (as a tax does). Economists worry about BRR's and MTR's as they get higher, since this reduces the (financial) incentive to work (or in other types of welfare policy-- to save, to get more education, etc.). 
-With no kids, the BRR is the reverse of the credit structure: 7.66%. 
-With 1 kid, the BRR is 16%; with two or more kids, it's 21%. 

4.) It follows that benefits have a "cut-off point" after reaching a certain income. 
-With no kids, HoH earning $14,590 receive nothing from EITC.
-With one kid, the cut-off point is $38,511; with two, it's $43,756; with three or more, it's $46,997.
-Being married always adds another $5,430 to the cut-off point.

Three things to note in closing. First, having one kid makes a big difference. The credit amount rises significantly. Having a second kid is worth another $2,155. #3 is only worth an additional credit of $683. More kids add nothing. Likewise, the cut-off point increases with number of children.

Second, note that the EITC "gives" while payroll taxes (FICA) "take away". (In fact, the EITC began as an effort to offset the regressive and staggering impact of FICA taxes.) The working poor are not hit by federal "income taxes", but they do get nailed by federal payroll taxes on income: 15.3% on every dollar earned-- no credits, deductions, or exemptions-- $1,000's annually from those at the poverty line. (A number of states also enjoy taxing the working poor.)

Third, overt taxes on income (e.g., 15.3% for FICA and in Indiana, a 6% MTR) combines with the implicit MTR from losing EITC benefits (typically 16-21%), yielding an MTR of 37-42%). Along with the loss of other means-tested government benefits as income increase, the MTR's are significant. During the peak of the War on Poverty, the average MTR's for the poor were in the 80-90% range-- while individuals can easily have MTR's over 100%. Would you work with an MTR of 80%?


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