Question

3] The government plans to offer a transportation tax credit in which families receive 80% of their expenditures on transportation to and from work or school as a reduction in their tax bill. It is considering two forms of this tax credit, one that is fully refundable and one in which the tax credit is limited to the amount of taxes the family pays. Which form of the tax credit is more progressive? Explain.

Answer 1

The fully refundable tax credit is a more progressive tax credit, this is because under progressive tax regime the aim is to ensure that individuals with less income shall be taxed at a lower percentage. This is to ensure that burden of unnecessary tax is not laid on individuals with low income. If the government decides to give tax credit only up to the taxes paid by individual or family, then the benefit of such tax credit will not be available to those who does not come under any tax slabs due to low income. If, however, government decides to provide full refund of such transportation cost then this will be applicable for everyone irrespective of the fact that they pay any taxes or they come under any tax slabs or not. Therefore, option of fully refundable tax credit is more progressive.