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A Brief History of Tax Credits

Tax Credits

The United States Federal tax credit system is maintained to provide leniency to taxpayers who are determined to merit such treatment by the government. Within the U.S., Federal tax credits are considered a means for the government to acknowledge that taxpayers have satisfied some though not every aspect of their financial obligation to the government.

Under the same name, Federal tax credits are also observed in Canada and Australia, and under the term "Avoir fiscal" in France. The concept operates somewhat differently in other taxation systems, such as that of the United Kingdom, where a tax credit is created by considering a deduction to have been made when such is not the case in reality. In United States practice, the legislative and executive branches have used the Federal tax credit option as a stimulus for economic activity and an incentive for political support.

In 1981 Congress passed the Economic Recovery Tax Act, which was intended to remedy the overall financial decline and assorted resultant hardships experienced in the late 1970s, when the industrial sector of the United States experienced a decisive blow.

To this end, the legislation shifted away overall tax policy from the overall model of the post-World War II era to an emphasis on reducing costs to business and thereby increasing economic activity across the board. These reforms were made in the spirit of the more conservative tenor of the Reagan Administration. As a part of these overall reforms, the legislation included a Federal tax credit of ten percent for investments.

A later significant achievement in the Federal tax credit area can be found in the form the Taxpayer Relief Act of 1997. In addition to the specific benefits of the Federal tax credits provided through this legislation, the overall significance of this legislation can be found in the way it introduced the concept as a viable and much-used aspect of the American tax policy of the late 20th and early 21st century.

Under this state of affairs, Federal tax credits have been offered in an increasing number of forms, many of which can be refunded by the taxpayer if certain conditions are found to be present. At the time of the Taxpayer Relief Act's passage, however, the most publicized and noted aspect of the legislation was its provision for a Per Child Federal Tax Credit, which allowed families falling beneath a certain income bracket to receive a credit greater than their previous financial liability for paying taxes. Initially placed at a level of $500 per child, this amount was later doubled in a Bush-era tax package passed in 2001.

Another significant and related portion of American Federal tax credit policy can be found in the provision made for a "Dependent Child." This measure was also supplemented in 2001 by the Bush tax cuts, and later in 2004 by the Working Families Relief Act, the latter of which newly established the qualifications for children whose care could be covered by Federal tax credits.

NEXT: First Time Home Buyer Tax Credit Extension

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