Question

Is the earned income credit a form of negative income tax? Why or why not?

Answer 1

Yes, the earned income credit (EIC) is catergorised as a form of negative income tax. EIC is a refundable credit that is purely based on the earned income (self employment or wages), and the number of children. It is primarily designed to offset the effect of employment taxes on compensation paid to income taxpayers who falls in lower income group and to encourage them to seek employment. It is a refundable credit even for income taxpayers who do not hold any income tax liability. EIC produces a negative income tax because it creates a credit for income tax which is refundable without any income tax having been paid in.