- Starting from zero, you owe no tax on the first $10,300. Before the federal government starts taxing income, it subtracts a chunk from the amount you earned.
- If you earn one more dollar, then you owe 10 cents. Above $10,300, you enter the 10% tax bracket. The first $10,300 still does not get taxed, but that one additional dollar gets taxed at a rate of 10%.
Taxes are more complicated, but that's the basic idea. What I just said is true for a typical unmarried person, but the same process---subtracting a chunk, then applying a tax rate to one additional dollar---applies to everyone.
One complication that I want to focus on in this post is a program that gives refunds to people who earn income. The program is called the EITC. An unmarried person with a child who earns $9,720 can claim a refund of $3,305, even though that person did not pay any taxes.
Two families could cooperate to make use of this tax refund. Suppose there are two single unemployed mothers, Denise and Emily, each of whom has one child. If Denise pays Emily $9,720 over the course of a year to babysit, and Emily pays Denise the exact same amount over the year to babysit, then both of them can get the $3,305 tax refund.
There are a few puzzles about the EITC.
- Many people who are eligible for this tax refund do not claim it. Sending them mail explaining the EITC helps.
- Many people who could easily become eligible by babysitting for each other, like Denise and Emily in my example, do not become eligible.
I would like for people to spread awareness of the EITC, the way the NWRO spread awareness of benefits in the 1960s.