Federal Tax Law Effect on Individual Taxpayers Regarding Earned Income Tax Credit

Federal Tax Law Effect on Individual Taxpayers Regarding Earned Income Tax Credit

Federal Tax Law Effect on Individual Taxpayers Regarding Earned Income Tax Credit

Jaree Chambers

DeVry University / Keller Graduate School of Management

Abstract

Federal tax law effects each taxpayer differently and can prove difficult to interpret. The differences very due to income, family size or family situations i.e. single, married, divorced, childless, etc., and allowable credits or deductions. During our review of the Federal tax laws in this paper, we will briefly document how the United States taxation system developed and the effects of the earned income tax credit on taxpayers.  While the earned income tax credit and the child tax credit came to be around the same time, we will focus on the earned income tax credit as it is our largest federal entitlement program.

Federal Tax Law Effect on Individual Taxpayers Regarding Earned Income Tax Credit

Taxation dates back to the United States Constitution empowering Congress to “lay and collect taxes, duties, imports and excises to pay the debts and provide for the common defense and general welfare of the United States.” Limitations were established limiting taxation as follows: “all duties, imports, and excises shall be uniform throughout the United States, that direct taxes should be laid in proportion to the population.” This language is key as many early tax laws were found to be unconstitutional due to these two simple terms: “uniform” and “direct taxes.” (Smith, Ephraim, Philip Hamelink, James Hasselback, CCH Federal Taxation: Comprehensive Topics, 127th Edition. CCH Inc., 2015. VitalBook File.)

Initially in 1861, during the Civil War, the Revenue Act of 1861 was passed by Congress which was subsequently repealed 10 years later. This act included a personal income tax to assist with paying for the war. Several years later in 1894, Congress passed a flat rate federal income tax.  This flat rate income tax was determined to be unconstitutional by the United States Supreme Court only one year later as it was considered to be a direct tax not distributed according to the population of each state.  In 1913 Congress ratified the 16th amendment modifying the language to allow taxation of income of individuals regardless of population of each State.  A plethora of additional amendments and tax codes followed developing one of the most complicated taxation systems ever.

Why and When

The Ford Administration via the Tax Reduction Act of 1975 enacted the earned income tax credit (EITC) with the intent of it being temporary. This credit enabled low income earners to offset other taxes and the increasing price of consumables due to the current level of inflation.  By 1978, the credit was made permanent through the Revenue Act of 1978.  At the time, EITC served both as an anti-poverty program and an alternative to welfare since it incentivized work.  Since its inceptions, changes have occurred to adjust for inflation and a more generous Congress increased the maximum allowable amounts overtime. (Hungerford & Thiess, 2013)