Tax credit: Difference between revisions
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==Tax credits in recognition of tax already deducted== |
==Tax credits in recognition of tax already deducted== |
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Within the [[Taxation in Australia|Australian]], [[Taxation in Canada|Canadian]], [[Taxation in the United Kingdom|United Kingdom]], and [[Taxation in the United States|United States]] [[tax]] systems, a '''tax credit''' is a recognition of partial payment already made towards [[taxes due]]. A similar concept exists ([[:fr:Avoir fiscal]]) in the [[Taxation in France|French tax system]]. This situation arises, for example, when standard rate tax has been deducted at source ("[[withholding tax]]"), but the tax-payer is subject to further taxation at a higher rate. It also applies in [[dividend imputation]] systems. |
Within the [[Taxation in Australia|Australian]], [[Taxation in Canada|Canadian]], [[Taxation in the United Kingdom|United Kingdom]], and [[Taxation in the United States|United States]] [[tax]] systems, a '''tax credit''' is a recognition of partial payment already made towards [[taxes due]]. A similar concept exists ([[:fr:Avoir fiscal]]) in the [[Taxation in France|French tax system]], for example in the Credit Impot Recherche <ref name="rdtc3">{{cite web |title =Is the UK R&D Tax Scheme Working? url = http://research-and-development-tax-credits-working}}</ref>. This situation arises, for example, when standard rate tax has been deducted at source ("[[withholding tax]]"), but the tax-payer is subject to further taxation at a higher rate. It also applies in [[dividend imputation]] systems. |
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In some countries (e.g. the [[Taxation in the United Kingdom|United Kingdom]]), "tax credit" refers to tax treated as deducted at source, which has not actually been deducted or paid. There is also a payable "R&D tax credit" available |
In some countries (e.g. the [[Taxation in the United Kingdom|United Kingdom]]), "tax credit" refers to tax treated as deducted at source, which has not actually been deducted or paid. There is also a payable "R&D tax credit" available as part of the [[Research and Development]] tax relief scheme in the [[UK|United Kingdom]] which refers to the cash element of a surrendered loss on eligible R&D work. This credit is worth up to 24.5% of eligible R&D spend<ref name="rdtc">{{cite web |title =French R&D Scheme| url = http://research-and-development-tax-credits.com/randd-france-cir }}</ref>. The tax relief was introduced for SMEs in April 2000 and extended to Large companies in April 2002. While it normally takes 10 years for R&D tax relief mechanisms to show an effect <ref name="rdtc2">{{cite web |title =Is the UK R&D Tax Scheme Working? url = http://research-and-development-tax-credits-working}}</ref> it is unclear whether the UK scheme has actually led to an increase in R&D in the UK. |
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==Tax credits as a form of state benefit== |
==Tax credits as a form of state benefit== |
Revision as of 18:21, 24 June 2009
The term tax credit describes two different concepts:
- The first is a recognition of partial payment already made towards taxes due.
- The second is a state benefit paid to workers through the tax system, which has the effect of increasing (rather than reducing) net income.
Tax credits in recognition of tax already deducted
Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is a recognition of partial payment already made towards taxes due. A similar concept exists (fr:Avoir fiscal) in the French tax system, for example in the Credit Impot Recherche [1]. This situation arises, for example, when standard rate tax has been deducted at source ("withholding tax"), but the tax-payer is subject to further taxation at a higher rate. It also applies in dividend imputation systems.
In some countries (e.g. the United Kingdom), "tax credit" refers to tax treated as deducted at source, which has not actually been deducted or paid. There is also a payable "R&D tax credit" available as part of the Research and Development tax relief scheme in the United Kingdom which refers to the cash element of a surrendered loss on eligible R&D work. This credit is worth up to 24.5% of eligible R&D spend[2]. The tax relief was introduced for SMEs in April 2000 and extended to Large companies in April 2002. While it normally takes 10 years for R&D tax relief mechanisms to show an effect [3] it is unclear whether the UK scheme has actually led to an increase in R&D in the UK.
Tax credits as a form of state benefit
Tax credits may be characterized as either refundable or non-refundable, or equivalently non-wastable or wastable. Refundable or non-wastable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system, appearing to be a moderate form of negative income tax. Examples of refundable tax credits include the earned income tax credit and the additional child tax credit in the U.S., and working tax credits or child tax credits in the UK.
A non-refundable or wastable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system. An example of a non-refundable tax credit is the Saver's Tax Credit [4] in the U.S. or the former children's tax credit in the UK. Another example would be declared gifts made to registered charities in the UK under the current Giftaid scheme, which attract tax relief (claimed by the charity) at the standard rate but which cannot reduce the donor's liability beyond the amount of tax actually paid by them in a given year. All tax credits in Ireland are non-refundable.
Conservatives or libertarians, who generally favor tax cuts, often criticize refundable tax credits, saying that they are actually subsidies disguised as tax cuts. In other words, they are spending in the form of direct transfers from the treasury to individuals, except that they are administered by the tax authorities rather than the agencies usually responsible for welfare.
Tax credits and minimum wage
Tax credits are like a means tested benefit paid direct to employees to encourage them into work. In the United Kingdom, ‘child tax credit’ and ‘working tax credit’ are paid directly into the claimant's bank account post office account or by giro . A minimum level of child tax credits is paid to all individuals or couples with children. The amount paid is increased if either parent works for at least 16 hours a week. Working tax credit is paid to single low earners without children who are aged 25 or over and are working over 30 hours per week and also to couples without children, at least one of whom is over 25, provided they are working for 30 hours a week combined and at least one of them is working for 16 hours a week. They are means-tested and the rules for calculating both child tax credit and working tax credit are very complex.
This indirect wage regulation forms an important part of income for low earners and their families. It reduces the stigma of collecting benefits for workers. Some commentators have suggested that raising the personal allowance could achieve a similar effect for single workers with reduced administrative burden for both employers and HMRC.
Some[who?] argue that tax credits contribute to poverty traps as they are tapered as earnings rise. The idea is that there is a reduced incentive to work when the added income is partially offset by the reduction in the tax credits. This is an area of debate among economists.[citation needed]
Tax credits and tax deductions
A tax credit is generally more valuable than a tax deduction or tax allowance of the same magnitude because a tax credit reduces tax directly, while a deduction or allowance only reduces taxable income and so the reduction in tax is only a fraction (the marginal tax rate) of the deduction or allowance.
In the United States corporate tax payers may lower the total amount of tax they owe to the federal government, via programs such as the New Markets Tax Credit Program.
Problems
In the UK the problem of tax credit overpayment has continued on a massive scale since inception leaving millions of claimants in debt. The cause of overpayment is many and complex at times, please see here for further information; tax credit overpayment
See also
- Government bond
- National Minimum Wage Act 1998
- Speenhamland
- Wage regulation
- Working Tax Credits (UK)
External links
- Understanding 2006 Hybrid Car Tax Credits at HowStuffWorks
- Tax Credit Casualties
- Tax Credit Casualties
- ^ "Is the UK R&D Tax Scheme Working? url = http://research-and-development-tax-credits-working".
{{cite web}}
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(help) - ^ "French R&D Scheme".
- ^ "Is the UK R&D Tax Scheme Working? url = http://research-and-development-tax-credits-working".
{{cite web}}
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(help) - ^ http://www.irs.gov/pub/irs-irbs/irb01-44.pdf