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Negative income tax and Welfare

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10/30/2015 9:58:06 PM
Posted: 2 years ago
At 10/30/2015 9:16:31 PM, tajshar2k wrote:
What is the difference?

Can somebody please explain?


Did someone say taxes? :)

Negative income tax is where you not only pay nothing in income taxes, but also receive money from the IRS. This is literally the IRS (or treasury, but whatever) giving you money based on your 1040. This is most often the case with the earned income tax credit, but can be seen in other situations as well (business losses, college credits, etc.)

Let's be simple here and say I make $20,000, the tax rate is 10%, and I get a deduction of $10K, and I had $1400 withheld from my paychecks.
This makes my taxable income (which is what income tax is based) $10K. ($20K - $10K). My tax is 10% of $10K, which is $1,000. I paid in $1400, so my refund is $400. This is not negative income tax, as I paid in $1000.

Similarly, negative income tax receipiants generally have $0 taxable income, and have some tax credit that gives them free money. This, is not the same as those with $0 taxable income, and only get back the money they paid in.

Welfare, works similar to the negative income tax, but it is based on more direct factors, like income and liabilities. The two often overlap, but the major difference is one is "run" by the IRS, while the other is run by HHS, and they have different criteria to get money.
Taxes are more "if you meet the criteria, you get the credit, which may yeild a negative tax liability".
Welfare is more "if you need aid, you get aid".
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