Tax benefits to families with children

Abstract

The article deals with theoretical and empirical research of the influence of social tax benefits (allowances) on welfare of families with children in Ukraine and worldwide. International comparisons of basic features and requirements that serve to qualify recipients of the social tax allowance such as income threshold; family size and composition (including relationships, number and age of children); amount of tax deduction (social tax allowance); a tax wedge on labour; untaxed income are carried out. Basic advantages of tax benefits in comparison with direct state aid are generalized in terms of welfare improvement for families with children. Tax benefits are argued to work better as incentives for parents to increase their labour efforts. In addition, they also decrease pressure on working population, lower demand for government expenditures and eliminate problem of "budget freeriders". Earned income tax credit (EITC) in the USA has been analyzed regarding whether it is effective in targeting social and fiscal issues in this country. The study concluded that EITC assists a wide scope of low-income families with children and thus establishes high income tax progressivity in different brackets in the USA. The special attention was paid to the provisions of EITC and other in-work tax benefits under the system of married couple (joint) tax filing whose introduction is being currently debated in Ukraine with the aim to promote more socially-oriented tax system. The efficiency of tax benefits for families with children in Ukraine has been challenged within the analysis of legislative provisions of social tax allowance (STA) and estimation of STA influence on the welfare of low-income (poor) families with children. We have found evidence that STA in Ukraine is characterized with restrictions that make a large group of families with children ineligible and thus a conclusion was made that STA discriminates against those who are really in need. Furthermore, insufficient amount of deduction within STA seems inadequate in order to reduce poverty or increase income tax progressivity. Consequently, some recommendations in order to improve STA in Ukraine are suggested.