Hot Topic (2/5): Is the Earned Income Credit fair to all taxpayers?

[Cafe GroupAdmin]

Tax Credit or Income Transfer?  

Whoever coined the saying "there is no such thing as a free lunch" never filed for the Earned Income Tax Credit. Although the tax season officially ends on April 15, many Americans will have to work well past that date just to pay their tax bill. Many Americans, that is, except those who receive the Earned Income Tax Credit.

Whenever one thinks of welfare and entitlement programs, the first thoughts that usually come to mind are things like food stamps, Head Start, and Medicaid, or acronyms like AFDC, WIC, and SSI. But one of the greatest forms of welfare - the ultimate free lunch - is the Earned Income Tax Credit (EITC in government jargon).

It has enjoyed bipartisan support in Congress. Economists from Berkeley and Harvard love it. Senators Russell Long and Lloyd Bentsen made it their "signature initiative." Nobel laureate Gary Becker praised it for aiding poor families without increasing reliance on public assistance.

Business Week columnist and Wall Street Journal contributing editor Robert J. Barro claims that is discourages welfare. Ronald Reagan heralded it as "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." Clinton's Labor Secretary Robert Reich advocated its expansion, along with the minimum wage, to give everyone in the bottom half of society "a chance to get on the escalator."

The IRS (publication 1622) advertises it as "The Tax Break for Hard-Working People." The government promotes this "tax credit" like it promotes none other. And unlike any other part of your tax return, you don't even have to figure your EITC - the IRS will do it for you!

So then, what is the purpose of this universally-lauded "tax credit," and how does one qualify for it? According to the IRS:

The Earned Income Tax Credit (EITC), sometimes called the Earned Income Credit (EIC), is a refundable Federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. The credit reduces the amount of Federal tax owed and can result in a refund check. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

Income and family size determine the amount of the EITC. To qualify for the credit, both the earned income and the adjusted gross income for 2003 must be less than $29,666 for a taxpayer with one qualifying child ($30,666 for married filing jointly), $33,692 for a taxpayer with more than one qualifying child ($34,692 for married filing jointly), and $11,230 for a taxpayer with no qualifying children ($12,230 for married filing jointly).

For 2004, some employees with at least one child living with them may be entitled to receive advance EITC payments in their paychecks. The employee must file Form W-5, Earned Income Credit Advance Payment Certificate, with an employer to receive the advance payments. The employer then pays part of the credit to the employee in advance throughout the year. The taxpayer claims the rest when filing the 2004 Federal tax return.

The EITC does not generally affect eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, or low-income housing.

Some observations. First, if social security taxes are a "burden," then why not reduce the social security tax rates or eliminate the tax altogether?

Second, why does the government have to provide people with "an incentive to work"? I thought eating was a good incentive to work? 

Third, the EITC is only "for low-income working individuals and families." But these people hardly pay any taxes. The ones who actually pay most of the taxes in the country don't qualify. The top 50 percent of income earners pay 96 percent of all federal income tax. The top 1 percent pay 36 percent, and the top 5 percent pay 55 percent of all federal income taxes.

Fourth, the EITC "reduces the amount of Federal tax owed." It is not like a deduction for charitable contributions or medical expenses that lowers your income and therefore your taxes. Instead, it actually directly reduces your taxes. You don't even have to itemize deductions to claim it.

Fifth, "Income and family size determine the amount of the EITC." There is a notable difference between the EITC and other forms of welfare - there is no asset test or net-worth ceiling to qualify. Having two cars in the driveway, a yacht at the marina, and a plane at the airport does not exclude anyone from receiving the EITC.

Sixth, the receipt of welfare in the form of the EITC does not hinder ones ability to receive other forms of government handouts. Eligibility for "Medicaid, Supplemental Security Income (SSI), food stamps, or low-income housing" is not generally affected by receiving the EITC.

Seventh, the EITC is refundable; that is, you get what is left after it covers your taxes. But not only that, you still get it even if you don't owe any taxes. This means that many people who don't pay any federal income taxes still get a tax "refund."

* * *

Do you think the Earned Income Credit (EIC) is welfare?

Is the EIC a fair system? 

What are your thoughts?

[Renee21]

I got it last year and I loved it. I don't this year and kinda wish I could. But in all honesty I thought it was weird that I was getting so much money from the gov't. I won't fight it. But I know I used it to pay off debt.

[LuvNMyBbs]

No, I don't think our entire tax system is fair including earned income credit.  That said I was still a little miffed when we made $204 to much to claim it.  I see it almost as a stimulus check for families that are the least likely to have money to spend which is how it usually goes.  Most families that get it don't save it but instead use it to get caught up on bills and buy the things they are wanting but could otherwise not afford.  Things varying from braces for their kids to a Wii.  There are a lot of unfair things about the tax code and what qualifies as a living wage.  I would love to see it all addressed but until it is I will not consider it welfare.  When a single mom working at the same job for two years actually makes enough money to pay all the necessities like rent and the like without having to either scrape by month to month or use public assistance I think it will make sense to no longer offer the EIC.  Until then I think it is an appropriate allotment of tax money.

[survivorinohio]

I think the EIC is crazy.  Really, free money isnt free. I dont think its fair to anyone though I see its appeal.  I really can understand why people love it but I think if the taxes were more fair in design that it would be an easier thing for everyone.  I have yet to go to bed, It has been a long night but I will be back with clearer more concise thoughts:)

[survivorinohio]

Quoting LuvNMyBbs:

No, I don't think our entire tax system is fair including earned income credit.  That said I was still a little miffed when we made $204 to much to claim it.  I see it almost as a stimulus check for families that are the least likely to have money to spend which is how it usually goes.  Most families that get it don't save it but instead use it to get caught up on bills and buy the things they are wanting but could otherwise not afford.  Things varying from braces for their kids to a Wii.  There are a lot of unfair things about the tax code and what qualifies as a living wage.  I would love to see it all addressed but until it is I will not consider it welfare.  When a single mom working at the same job for two years actually makes enough money to pay all the necessities like rent and the like without having to either scrape by month to month or use public assistance I think it will make sense to no longer offer the EIC.  Until then I think it is an appropriate allotment of tax money.

An aside, my daughter got back quite a nice return and wanted to buy a wii.

There is no wii to be had in our city, period.  I know thats another thread... 

Sorry op back to topic, sure families that need it get it I guess but even so I think the premise is a little crazy.  Should we even be able to consider buying a wii?  I dunno our lifestyle here in the US is inflated.

[Kiki_pie1979]

i wish i could say i really understnd taxes and how we all get what, or pay what.etc...but i have never understood them, and even if we had to pay in i would have to get someone else to help me fill out the tax papers.but we are one of those who get back money rather than pay in,my mom use to get it when i was a child, and now she has to pay in. i am not really sure if i think it is fair or not.i wont lie and say i wasnt thrilled to find out the amount we got this yr that went into the bank this morning actually.and we are using ours to pay big bills like house ins,etc...and we are saving the rest so that we have something to lean on this yr if things get tight again. basically, this yr i am so so thankful for it.it is a life saver to us, and i could never express how thankful i am for it and plan to use mine as wisely as i possibly can

[Malapertinent]

Not sure.  This is the first time I was eligible for it.

[JenE4]

What are the chances someone making this:

Income and family size determine the amount of the EITC. To qualify for the credit, both the earned income and the adjusted gross income for 2003 must be less than $29,666 for a taxpayer with one qualifying child ($30,666 for married filing jointly), $33,692 for a taxpayer with more than one qualifying child ($34,692 for married filing jointly), and $11,230 for a taxpayer with no qualifying children ($12,230 for married filing jointly).

...has this:

a yacht at the marina, and a plane at the airport does not exclude anyone from receiving the EITC.

I'm okay with it even if it means I pay a higher tax rate because of it. We make over $200,000 combined and do NOT live a lavish lifestyle by any means (although we do put a lot into savings). So I can't imagine how a family could live on $30,000 or less. (Granted, cost of living in my state is higher than the other states in the nation.) 

[Kiki_pie1979]

let me tell u it is hard to live on 30,000 or less. we make 20,000 a yr and my husband has a government job and never gets less than 40 hours a week, plus works extra odd jobs on weekends.

[momandvet]

Earned Income Credit gives the hard working Americans that aren't earning living wages a fighting chance.    Idealy these people wouldn't need it, but the reality is that most people have jobs and still need assistance

[la_bella_vita]

Quoting momandvet:

Earned Income Credit gives the hard working Americans that aren't earning living wages a fighting chance.    Idealy these people wouldn't need it, but the reality is that most people have jobs and still need assistance

I agree