 Introduction
Tax credits are essentially money payments paid through the tax system. They can either paid out in full just like a welfare benefit, and/or they can be set off against tax liabilities - to create a net benefit payment (or a lower tax demand).
They bear some similarities to Negative Income Taxes ? particularly in that income is calculated by the tax authorities, and can be paid out through the tax system. However, the political history of the EITC reveals it to have been introduced to head off NIT proposals. Whereas NITs are paid to all families ? including those without work ? most tax credits are linked to earnings and function as an in-work benefit. Moreover, until recently most tax credits have only been paid to households with children.
Some of the main international examples of tax credits - such as the US earned Income Tax Credit (EITC) and the British Working Families Tax Credit (WFTC) are described in more detail elsewhere (see UK and US tax credit resources). Of particular interest are the recent British reforms to the WFTC which split their credit into a Child Tax Credit (CTC) and a Working Tax Credit (WTC). The CTC extends payment to out of work households ? thus effectively creating a negative income tax for families with children, while the WTC is extended to working people without children ? thus creating a guaranteed minimum income (together with a minimum wage) for people in work.
One could imagine further British reforms which extended the CTC to households without children - thereby creating a variant of a negative income tax and integrating many taxes and benefits.
Contents
British WFTC, CTC, WTC
US EITC
Further Reading
Patricia Apps, "Why an Earned Income Tax Credit Program is a Mistake for Australia", Centre for Economic Policy Research Discussion Paper 431, 2001 Australia
Lisa Barrow and Leslie Moscow McGranahan, "The Earned Income Credit and Durable Goods Purchases", Joint Center for Poverty Research US
Mike Brewer and Paul Gregg, "Eradicating Child Poverty in Britain: Welfare Reform and Children Since 1997", Institute for Fiscal Studies WP01/08, 2001 UK
Mike Brewer, Tom Clark, and Michal Myck, "Credit Where It's Due? An Assessment of the New Tax Credits", Institute for Fiscal Studies Commentary 86, 2001 UK
Mike Brewer, Michal Myck, and Howard Reed, "Financial Support For Families With Children: Options for the New Integrated Child Credit", Institute for Fiscal Studies Commentary 82, 2001 UK
Rebecca M. Blank, David Card, and Philip K. Robins, "Financial Incentives for Increasing Work and Income Among Low-Income Families", Joint Center for Poverty Research US
Richard Blundell, Alan Duncan, Julian McCrae, and Costas Meghir, "Evaluating In-Work Benefit Reform: The Working Families Tax Credit in the U.K.", Joint Center for Poverty Research UK
Richard Blundell, "Work Incentives and 'In-Work Benefit Reforms: A Review", Oxford Review of Economic Policy, Vol 16 No 1, 2000 UK
Stacy Dickert-Conlin and Douglas Holtz-Eakin, "Employee-Based versus Employer-Based Subsidies to Low-Wage Workers: A Public Finance Perspective", Joint Center for Poverty Research US
David T. Ellwood, "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements", Joint Center for Poverty Research US
Carolyn J. Hill, V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz, "EITC Eligibility, Participation, and Compliance Rates for AFDC Households: Evidence from the California Caseload", Joint Center for Poverty Research US
HM Treasury, "Tackling Poverty and Making Work Pay - Tax Credits for the 21st Century", 2000 UK
HM Treasury and Inland Revenue, "The Child and Working Tax Credits", 2002 UK
Janet Holtzblatt and Robert Rebelein, "Measuring the Effect of the EITC on Marriage Penalties and Bonuses", Joint Center for Poverty Research US
V. Joseph Hotz and John Karl Scholz, "The Earned Income Tax Credit", Working Paper for NBER Conference 2000 US
V. Joseph Hotz, Charles H. Mullin, and John Karl Scholz, "The Earned Income Tax Credit and Labor Market Participation of Families on Welfare", Joint Center for Poverty Research US
Marilyn Howard, "Designing the Employment Tax Credit", Poverty 107, 2000 UK
Derek Hum and Wayne Simpson, "Whatever Happened to Canada's Guaranteed Income Project?" Canada
David Ingles, "Rationalising The Interaction of Tax and Social Security. Part 1: Specific Problem Areas. Part 2: Fundamental Reform Options" Centre for Economic Policy Research Discussion Papers 423 and 424, 2000 Australia
JCPR Policy Brief (Vol. 3, No. 1): The Illinois Earned Income Tax Credit: JCPR Legislative Research Briefing", Joint Center for Poverty Research US
Jeffrey Liebman, "Lessons About Tax-Benefit Integration from the US Earned Income Tax Credit Experience, Joseph Rowntree Foundation, 1997 UK and US
Jeffrey B. Liebman, "Who are the Ineligible EITC Recipients?", Joint Center for Poverty Research US
Nina Manzi and Joel Michael, "The Federal Earned Income Tax Credit and The Minnesota Working Family Credit" , 2000 US
Janet McCubbin, "EITC Noncompliance: the Misreporting of Children and the Size of the EITC", Joint Center for Poverty Research US
Pamela Meadows, "The Integration of Taxes and Benefits for Working Families With Children", Joseph Rowntree Foundation, 1997 UK
Bruce D. Meyer and Dan T. Rosenbaum, "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects", Joint Center for Poverty Research US
Bruce D. Meyer and Dan T. Rosenbaum, "Welfare, the Earned Income Tax Credit, and the Employment of Single Mothers", Joint Center for Poverty Research US
Charles Michalopoulos, Philip K. Robins, and David Card, "When Financial Incentives Pay for Themselves: Early Findings from the Self-Sufficiency Project's Applicant Study", Joint Center for Poverty Research US
Jane Millar and David Hole, "Integrated Family Benefits in Australia and Options for the UK Tax Return System", Joseph Rowntree Foundation, 1998 UK and Australia
David Neumark and William Wascher, "Using the EITC to Increase Family Earnings: New Evidence and a Comparison with the Minimum Wage", Joint Center for Poverty Research US
Gerry Redmond, "Tax-Benefit Policies and Parent's incentives To Work: The Case of Australia 1980-1997" SPRC Discussion Paper 104, 1999 Australia
Jennifer L. Romich and Thomas Weisner, "How Families View and Use the EITC: The Case for Lump-sum Delivery", Joint Center for Poverty Research US
Timothy M. Smeeding, Katherin Ross Phillips, Michael O'Connor, and Michael Simon, "The Economic Impact of the Earned Income Tax Credit (EITC)", Joint Center for Poverty Research US
"Guaranteed Annual Income: A Supplementary Paper", Social Security Reform Discussion Paper, Federal Government, 1994 Canada
Floor M. Van Oers, Ruud A. de Mooij, Johan J. Graafland and Jan Boone, "An Earned Income Tax Credit in the Netherlands: Simulations with the MIMIC Model", Research Memorandum, CPB Netherlands Bureau for Economic Policy Analysis, 1999 Netherlands
Dennis J. Ventry, "The Collision of Tax and Welfare Politics: The Policy History of the EITC, 1969 - 1999", Joint Center for Poverty Research US
Robert Walker and Michael Wiseman, "The Possibility of a British Earned Income Tax Credit", Fiscal Studies, Vol 18, No 4, 1997 UK
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