But what exactly does the EITC do and is it a re-distribution of wealth from those who pay taxes to those who don't?
I started with an Internet search and found a website that helps you determine eligibility and estimate an amount of EITC for which you may qualify. But using that site required earnings, and other financial data, so I created a hypothetical and here's what I found.
My hypothetical is a single mother earning $8/hr. in a 35 hour/week part-time position. She has 1 child, no alimony nor other income. Her yearly gross income would be $14,560. According to 2007 withholding tables, if she claimed 2 exemptions (herself and her child), she would have had $510.50 withheld from her pay for federal taxes.
If she used the 1040EZ form, filing single, she'd be able to use the standard deduction of $8,750, making her taxable income $5,810. (I did not calculate her taxes using a standard 1040 form so I do not know if the form used would have made a difference in her taxable income.)
According to the tax tables, she would owe a total of $583 on taxable income of $5,810. As she already had $510.50 withheld, she'd be writing a check to the federal government for the difference of $72.50.
But ... she's eligible for the EITC - an estimated amount of $2,850.
The way the form is set up, that $2,850 dollar value is a credit and gets added to what you've already paid in taxes through your withholding. This gives my hypothetical mother a total of $3,360.50 'paid' ... significantly more than the $583 the tax tables show she owes.
So, in this example, my single mother will be getting a refund of $2,777.50.
Now, she only paid $510.50 and she owed $583...but she'll be getting a check from the government for $2,777.50. That's 48% of her taxable income that she's getting 'back.'
We all know that government has no money of its own - only what it collects from others. This means that people who pay taxes are the ones who are giving this 'refund' to my single mother. And by 'pay taxes' I mean all of us who have taxes withheld and either get back less than what we paid in - or actually owe more (on top of our withholdings) when we prepare our 1040s.
In this example, the EITC is a re-distribution of wealth. And I cannot help but wonder why we, as a nation, think this is okay, acceptable, appropriate, fair, or any other word you'd like to use to describe this action.
And does anyone else have a problem with our elected officials going around and telling people to claim this re-distribution of wealth in the guise of 'bringing money into our local economy'? From the letter to the editor:
"Families and individuals deserve to keep what they've earned and this free tax preparation will make that happen.
Even if you don't qualify for the EITC, the benefits to our local economy are enormous. The EITC is truly the best economic stimulus available. If everyone who qualified for this money took advantage, we'd bring millions of dollars into our local economy, supporting local businesses, jobs, and wages."
Um - I'd like to keep what I earn as well, but this program makes my family pay so others can have our money instead.