The voices of Tax Policy Center's researchers and staff
The tax system serves two purposes. It is supposed to collect enough money to fund government (a job not well done) and it helps maintain the social safety net. But as policy makers tackle the harsh reality of massive budget deficits, will they obsess about revenue collection and shortchange the tax system’s cash-transfer function?
Two recent budget proposals – one from the Bipartisan Policy Center (BPC) and another put forth by the chairs of the White House fiscal commission , or“Bowles-Simpson”– suggest the answer is “no.” Both preserve major tax benefits for low- and middle-income families with children. However, benefits would fall from the relatively high levels born of the recent economic stimulus. The BPC plan would greatly strengthen the social safety net for low-income workers without children.
Today, the largest cash transfer program for low-income families – the Earned Income Tax Credit (EITC)– is administered through the tax system. Several other tax credits buttress that support, including the Child Tax Credit (CTC) and the Making Work Pay (MWP) tax credit. A family with two children and poverty level wages ($14,570) in 2010 can receive an income boost of $7,436-- more if the family is headed by a married couple. That’s more than a 50 percent increase. For these households, the tax system seems to be working pretty well.
The BPC proposal includes a universal child credit of $1,600 per child and an earnings credit of 21.3 percent of the first $20,300 of income for each worker in a household. While Bowles-Simpson would eliminate nearly all targeted tax breaks, this plan seems to leave both the EITC and the CTC intact.
Neither the BPC plan nor the Bowles-Simpson plan keeps the lowered threshold for refundability for the CTC or the expanded EITC for families with three or more kids enacted as part of the stimulus legislation.
Under the BPC plan, a single parent with two children and poverty level wages would get a maximum subsidy of about $6,300. With the CTC credit threshold returning to 2001 levels, this family would receive almost no CTC under Bowles-Simpson but would get a full EITC of just over $5,000. Low-income families would lose their current MWP credit under both plans, but that credit is scheduled to expire this year anyway.
Tax changes besides tax credits will also affect low-income families. Overall, the Tax Policy Center estimates that – relative to current policy that does not include the Making Work Pay tax credit or the reduced threshold for CTC refundability, the lowest 20 percent of earners would see their taxes rise by $5 under BPC and $402 under Bowles-Simpson.
However, under the BPC plan, how families fare depends on how many children they have. As far as I can tell, workers without custodial children may win big! Today, they receive almost no EITC. Under BPC, they’ll get the same 21.3 percent credit as everyone else. And couples with two workers receive two credits.
In 2010 and under Bowles-Simpson, a single person without children earning $14,570 receives no EITC. But under BPC, they can expect $3,195. That’s a huge change in policy that answers an oft-lobbed criticism of the EITC.
Overall, I’d say both plans recognize that the federal income tax code plays a huge role in maintaining America’s social safety net, although under either plan that safety net is not as large for families with children as it is today. But BPC expands that safety net from where it is today to catch those with no children living at home.
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