| Earned Income Tax Credit |
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Other countries with EITCs include Britain, Canada, Ireland, New Zealand, Finland, Belgium, France, the Netherlands and Denmark. In some cases, these are small (the maximum EITC in Finland is 290 Euros), but others are even larger than the US EITC (the UK EITC is worth up to 6150 Euros). STRUCTURE The EITC in the United States is characterized by a unique three-stage structure that consists of a phase-in range in which the credit increases as earnings increase, a plateau range in which the maximum credit has been reached and further earnings do not affect it, and a phase-out range in which the credit decreases as earnings increase. Currently, for a family with two dependent children, the credit is equal to 40 percent of the first $10,750 earned, plateaus at a maximum credit of $4,400, begins to phase-out when earnings increase beyond approximately $15,000, and reaches zero when earnings pass approximately $35,000. For filers using the Married Filing Jointly status, the phase-out thresholds are increased by $2000. For a family with one dependent child, the structure is similar but has a phase-in rate of 34 percent and a maximum credit of $2,604. For those filing without dependents, there is a small credit of 7.65 percent of earnings with a maximum of $380, which covers the employee's portion of the Social Security Tax . All dollar amounts are now indexed to inflation. In addition to the federal EITC, 11 states have their own refundable EITCs. These state plans mimic the federal EITC’s structure on a smaller scale, as individuals receive a state credit equal to a fixed percentage – between 15 and 30 percent depending on the state – of what they received from the IRS. Furthermore, small local EITC’s have been enacted in New York City, Montgomery County in Maryland, and San Francisco. IMPACT The EITC is the largest workers live in families near or below the federal poverty line, as most are teenagers, young adults, students, or spouses supplementing their studies or family income. Almost 21 million families received more than 36 billion dollars in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line. Since the poverty line can be a watermark for eligibility for state and federal benefits, taxpayers receiving the EITC are less eligible for Entitlements , and so the EITC reduces entitlement spending.and around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively gaining as much as $18.4 billion. Research shows that the EITC has also boosted Labor Force Participation , particularly by low-educated single mothers. However, there is also evidence that this increase in labor supply has led to a fall in hourly wages among those eligible for the credit. UNCOLLECTED TAX CREDITS Millions of families who are eligible for the tax credit do not receive it, leaving billions of additional tax credit dollars uncollected. Research by the General Accounting Office (GAO) and IRS indicates that between 15% and 25% of Households who are entitled to the EITC do not claim their credit, or between 3.5 million and 7 million households. The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion, or more than $12 billion if the unclaimed rate is 25%. SEE ALSO
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