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Friday, February 8, 2013

Mulligan: Unemployed Receive Greater Earned Income Tax Credit Than Employed

New York Times:  Earned-Income Ironies, by Casey B. Mulligan (University of Chicago, Department of Economics):

The “earned income tax credit” is, ironically, more likely to be received by unemployed people than by workers who do not spend any time unemployed. ...[B]ecause the credit is administered on a calendar-year basis and is phased out with calendar-year wages and salaries, it is disproportionately received by people unemployed after a layoff.

As I illustrated in an earlier post, the credit follows a mountain-plateau pattern: an increasing portion for the lowest calendar incomes, a flat portion, a decreasing portion and then a flat portion of zero.

You might think that unemployed people do not receive the credit because they do not have any wage or salary income, but typically people unemployed from layoff do have wages or salary income during the calendar year of their unemployment from their previous job. Their layoff might have occurred after the beginning of the calendar year. Even a layoff occurring in December of the previous year might generate wage and salary income in the current year because of a severance payment or accumulated sick and vacation pay. ...

For most of the returns with both unemployment income and the earned income tax credit, the credit would have been even greater if the taxpayer had been employed fewer weeks than he or she actually was. Still more returns with unemployment income but no earned income tax credit would have received the credit if the unemployment had lasted longer.

This situation occurs so often because unemployment benefits are based on a person’s weekly work situation while the earned income credit is based on a household’s annual wages and salaries, and because weekly unemployment benefits by themselves are usually less than weekly wages and salaries.

The earned income tax credit is thus a good example of how a so-called tax credit can act like a tax from a working person’s point of view.

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