The earned income tax credit provides tax relief to some working class families. But, this comes at a price. While it provides tax relief to those with very low incomes, the phase out of the EITC, combined with state taxes and FICA taxes imposes extremely high marginal tax rates (for heads of households and married couples with children, about 48%, higher than any other taxpayer at any income level).
The real marginal tax rate faced by these families is even higher, because many receive means tested benefits at lower incomes that they cease to qualify for at the same time that the EITC is being phased out.
How much of an incentive would you have to work harder if you knew that 48% of each additional dollar you earned went to taxes, and that in addition you lost eligibility for programs from Medicaid, to food stamps, to free and reduced price school lunches, to tuition breaks for everything from pre-school at the public schools to college educations?
While I favor tax relief for working families, it needs to be done in a manner that is far more sensitive to marginal income tax rates of the working class.
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