Thursday, April 19, 2007


A phasein is the opposite of a phaseout, a tax benefit is increasing with increasing income. It sounds too good to be true, but in fact the EITC works exactly like this. The EITC is a refundable credit that increases together with an increase in income, reaches a plateau and finally decreases in a phaseout range.

The EITC is such a special mechanism that it is also probably abused. Rather incredible amounts of non compliance were reported in the past by the IRS "Despite these efforts, the IRS has been unable to significantly reduce noncompliance. The most recent compliance study (of TY 1999 returns), reported that between $8.4 and $9.9 billion in EITC claims (27% to 32%) had been improperly paid. Based on “significant compliance problems” associated with the EITC, the General Accounting Office has listed the administration of the credit as a “high risk area for the federal government.”

For our purpose, a phasein results in a decrease in the marginal rate. In fact because the EITC applies to income ranges with very low statutory rates, the marginal rate may become negative. This rather strange behavior is apparent on the figure shown on the first post of this blog. Understanding how the marginal rate could ever become negative was a reason I wanted to understand in more detail the tax mechanisms in the US.