Did I Pay My Fair Share of Income Taxes?

March 19, 2015

Here we are again approaching the deadline for filing income tax returns. I’ve just finished an all-day session with my tax software and miscellaneous 1099s, receipts, cancelled checks and the like. Now I ask myself whether I paid my fair share.

To borrow from a former President, it depends on what the meaning of “fair” is. Like most people, I suppose, I believe it begins with paying more than filers with lower incomes. Like most, but not all people. We mustn’t forget the flat tax folks, who’d consider our tax system fair if everybody paid the same share of his/her income.

I’m pretty sure I paid more than people with considerably lower incomes, but I doubt that translates into my fair share. I’ll tell you some of the reasons why because they speak to what seem to me dubious preferences built into the federal tax code.

First off, I paid a lower percent of my income than people who earned the same amount by working. That’s because I benefited from the preferential rate for both capital gains on assets held for more than a year and qualified dividends, i.e., those that meet specific criteria, as most paid to shareholders in U.S. corporations do.

Defenders of the rate claim, among other things, that it’s an incentive to invest — thus grows our economy, creates jobs, etc. This seems to me pretty lame. What would I do with the money instead? Spend it all, which itself would grow the economy? Put it under my mattress? In a savings account, where it would lose purchasing power because the interest rate is usually lower than the inflation rate?

Defenders also claim the money has already been taxed, either as corporate profits or as income earned by working. For me, the latter isn’t altogether true — at least, not in the sense that I would be taxed twice. I have as much investment income as I do because I was a beneficiary of trusts established by my grandmother and younger sister.

I sold some of the stocks I inherited last year and others in earlier years. I didn’t pay taxes on anything close to the difference between purchase and sale prices — the usual basis for capital gains. Instead, I paid only the market value the stocks had gained since the trusts passed them along to me.

So the total profit was far greater than the taxed amount because the value of the stocks was “stepped up” to the dates when my grandmother and sister died. Nobody paid taxes on the value gained before then. I can’t see what’s fair about that.

But it’s not exactly a loophole, as President Obama has termed it. It’s a feature, not a bug in the estate tax — and ardently defended.

What then about the income taxes I pay to the District of Columbia? The District has a fairly progressive income tax structure. But the tax itself is based on the federal, both adjusted gross income and itemized deductions.

So the break for capital gains and dividends carries over. Likewise, the hidden capital gains break due to the stepped-up basis. I thus benefit twice over.

I don’t want any misunderstanding here. I’m not — and never was — one of those CEOs or hedge fund managers whose compensation packages are artfully structured to minimize what they owe Uncle Sam.

I’m a fairly ordinary middle-class person, born to middle-class parents, one of whom had a parent who actually bootstrapped his way off the streets of New York. Wouldn’t have those trust assets without him.

I understand that the tax code can’t be rejiggered to compensate for the advantages I’ve had because I chose my parents wisely. But that doesn’t mean it should pass those advantages along by preferential rates and the like.

The tax code, after all, is how our federal, state and local governments raise revenues for all the programs and services that compensate for disadvantages — from pre-birth through adulthood — that make it so difficult for people born poor and near-poor to live in reasonable comfort and security.

The Institute on Tax and Economic Policy says that a “fair tax system is one that asks citizens to contribute to the cost of government services based on their ability to pay.” I’m inclined to go further because so many critical services don’t cost enough now.

All but 14 of more than 150 federal programs that are supposed to serve the needs of low-income people — and in some cases, others too — have less in real dollars this year than they had in 2010. About a third have effectively been cut by at least 15%.

This argues for an end to sequestration, i.e., the spending caps Congress passed as a fallback, thinking (wrongly) that the members appointed to the so-called supercommittee would come up with a more sensible deficit reduction plan.

Such a plan would surely include measures to raise more revenues from individuals who have the ability to pay, as well as corporations that now have — and exercise — the ability to pay less than nothing.

Two Republican Senators — Marco Rubio and Mike Lee — have instead come up with a plan of sorts that would, among other things, altogether eliminate the capital gains, dividends and estate taxes.

If you think the tax code is unfair now, as I do, just imagine how more unfair it might be. And how much more unfair our country would be, since the Rubio-Lee plan would cause the deficit to skyrocket.

We know what would happen to programs for low-income people then. We need only look around our communities to see what’s happened already.

 

 


Why Worry Now About Time-Limited Refundable Tax Credit Expansions?

March 12, 2015

Say Congress decided to preserve the expansions of the Earned Income Tax Credit and Child Tax Credit that were originally part of the Recovery Act. What would this mean for low and moderate-income working families? Citizens for Tax Justice answers.

In 2018, more than 13 million families, including about 24.8 million children would benefit by an average of $1,073 per family. They’d gain an average of $905 per child. This is only the first year the tax credits will revert to their earlier forms unless Congress acts.

CTJ provides state-by-state estimates, as well as these national estimates — and for each of the refundable tax credits, as well as the two together.

So we learn, for example, that 20,175 families in the District of Columbia, including nearly 45,000 children would benefit from the two tax credits combined. Their average gain would be slightly more than the national average — $1,093 per family. This is somewhat more than two whole weeks of pay for a full-time worker earning what will then be the minimum wage.

The expanded CTC would have the greater impact in terms of both the number of families helped and the average per child benefit, according to the estimates. This is presumably because, without the expansion, families who owe less than zero in income taxes couldn’t receive any refund at all unless their incomes were somewhere around $14,700.

But, as I noted in an earlier post, the District’s own EITC is linked to the federal, as is also the case for all but one of the 25 states with their own EITCs. So the ultimate boost to family budgets is greater than what CTJ estimates.

The flip side of all this, of course, is that a large number of family budgets would take a hit if Congress lets the refundable tax credit improvements die. And that seems thus far what Republicans have in mind.

They do rather like the notion of a child tax credit. But they would expand it up the income scale, while letting the threshold for claiming it revert to its pre-Recovery Act minimum, plus all the inflation adjustments since 2009 — and further adjustments yearly.

The bill the House passed last year, with some Democratic support, would have reduced after-tax income not only for families that couldn’t claim the refundable CTC at all, but for those with incomes as high as $40,000 a year.

President Obama’s budget would make the Recovery Act improvements permanent. The first-year cost in lost revenues would be slightly under $14 billion, CTJ says. A small fraction of the budget, but not chump change.

And, of course, the 10-year estimate we’re used to seeing is considerably higher — roughly $103.8 billion, if I’m reading the Treasury Department’s table correctly. But the President’s budget includes revenue-raisers too.

Well, the President has proposed locking in the EITC and CTC improvements before. Best he could get was an extension that will expire at the end of 2017. Many of us haven’t even filed our 2015 tax returns yet. Why should we worry about 2018 now?

The answer lies in what’s underway in our Republican-controlled Congress. On the House side, Republicans are again moving to convert time-limited tax breaks, mostly for businesses, into permanent law.

The packages they’ve already passed will cost more than $93 billion over the first 10 years. No offsets for the revenue losses, just as there weren’t last year. And there are other temp-to-perm tax breaks in the pipeline.

The more such “tax reform” we have, the slimmer the chances of saving the refundable tax credit improvements. Just look at that deficit, Republicans will say when the improvements are about to expire. Can’t possibly extend them. Next thing you know, we’d be Greece.

We need also to consider the practical politics of trying to pass a bill that does nothing by extend expanded tax breaks for lower-income families. Things being as they are, these benefits don’t stand much of a chance unless they’re packaged with others that appeal to Congress members who’ve got their eyes on wealthier constituents and/or corporate donors.

This, I think, is what top experts at the Center on Budget and Policy Priorities meant when they said, about last November’s huge tax break package, that it risked “stranding” the temporary EITC and CTC provisions that have proved so beneficial to low-income working families.

The fewer tax breaks Congress has left to extend, the fewer the “linkages” supporters can make — or perhaps one should say the fewer opportunities for horse-trading.

In another world, we wouldn’t need them. The EITC and CTC, in their current forms, have lifted more people out of poverty than any other federal benefit, except Social Security — 8.8 million last year, the Census Bureau reports.

The tax credits reward work. We’re supposed to like that. They help support families with children. We’re supposed to like that. And I believe we do, Republicans and Democrats alike, though we’ve differences between and within the parties on certain types of families.

Be that as it may, the EITC and CTC expansions are clearly endangered. We’d otherwise find them in bills that aim to make other time-limited tax measures permanent. And we certainly wouldn’t have had Republicans blaming their exclusion on the President’s immigration actions.


Why We Should Care About Payroll Tax Holidays for High Earners

February 19, 2015

Last week, the top 1% of American workers finished paying their Social Security taxes for the year — an inflection point flagged and flogged by the Center for Economic and Policy Research. On the very same day, the Senate Budget Committee held a hearing on the impending depletion of the Social Security Disability Insurance trust fund.

These two events are related because the first provides a fresh perspective on the second, as well as a solution that’s not fresh, but seems sensible anyway.

As I’ve written before, the so-called DI trust fund will run out of reserves in 2016, unless Congress and the President agree on a solution. If they don’t, former workers with severe disabilities will receive only about 80% of their benefits — an average loss of nearly $244 per month.

That’s a real dent in the household budget. Average benefits now are $1,165 a month for disabled workers themselves and only $811 more for those with qualifying spouses and children.

The shortfall has been predicted for a long time, based mainly on demographic changes in the workforce, e.g., the aging of the baby boomer cohort, the large increase in the number of women working — and working long enough to qualify for SSDI.

Federal policy choices have contributed as well — specifically, the decision to take some pressure off the Old Age and Survivors trust fund by raising the eligibility age for full retirement benefits. But for that, many disabled baby boomers wouldn’t be receiving SSDI benefits any more.

All these factors explain why money is going out of the DI trust fund. The beginning of the payroll tax holiday for the very highest earners — and upcoming tax holidays for others who are doing quite well — explains why not as much money is flowing in.

As I’m sure you know, all of us who get paid for our work owe payroll taxes. If we’re employees, we pay 6.2% for Social Security. Our employers deduct it from our checks and pay the same amount. If we’re self-employed, we owe the whole 12.4%.

But the income subject to Social Security payroll taxes is capped — and always has been. For more than 30 years, the cap has been adjusted annually based on the average national wage index.

The index almost always rises, though rarely by a lot. The cap this year is $118,500 — up by $1,500 from last year.

But as everyone who hasn’t been living in a cave knows, more and more income is flowing to very high earners — those making a million or more a year. There were already six times as many of them in 2013 as in 1989, according to the Center for American Progress.

So more and more income escapes the Social Security tax. And it’s not only wage income enjoyed by the millionaires and billionaires, as this year’s cap indicates.

Class warfare alert! Not really. The point is that income inequality helps explain why the DI trust fund could soon run dry — and why the OASI trust fund will long about 2034 — unless our federal policymakers come up with a way to preserve the benefits that most workers and their families need.

A stopgap solution we already have — a relatively small increase in the share of payroll taxes going to the DI trust fund. But as I recently wrote, House Republicans have passed a rule to block any such shift, precedents notwithstanding.

They say they want a long-term solution to the whole solvency problem. Thus far, however, the most we can glimpse of what they have in mind comes from Senate Budget Committee Chairman Mike Enzi, who opened last week’s hearing.

He trashed on the President, of course — in part, for proposing the payroll tax shift. But he also suggested that more workers with disabilities severe enough to meet SSDI’s strict standards could actually work because technology enables people to work from home, start their own businesses, etc.

Michael Hiltzik at the Los Angeles Times perceives a move to distinguish deserving from undeserving SSDI recipients. Perhaps. Or perhaps it means something that one of Enzi’s friendly witnesses advocated “early intervention,” i.e., rehabilitation and other services to keep people with “work-limiting conditions” in the labor force.

Bottom line, however, is that enabling some additional workers with disabilities to remain gainfully employed won’t do a whole heck of a lot to keep the DI trust fund solvent — and nothing at all to preserve full benefits for retirees.

Uncapping the payroll tax cap would. If Congress had simply scrapped the cap four years ago, it could have closed about 90% of the projected funding gap for 75 years.

Other cap-scrapping scenarios could have closed roughly 70-80%. These, which seem more politically realistic, would have boosted benefits for higher earners, as well as capturing more of their income. We’ve had cap-lifting, as well as cap-scrapping proposals too.

So there’s more than one way to minimize the projected shortfall. But any solution that leaves the cap alone is bound to severely reduce retirement benefits — perhaps deny some severely disabled workers and their families any benefits at all.

Not much of a worry for those folks whose tax holiday has already begun. But for the rest of us ….


If You Don’t Like the Answer, Change the Question

January 12, 2015

A recent New York Times op-ed warns that the Republican leadership will instruct the (up till now) nonpartisan Congressional Budget Office to use dynamic scoring when it estimates the revenue impacts of changes to the tax code.

The House of Representatives, in fact, passed a rule last week that requires not only CBO, but the also nonpartisan Joint Committee on Taxation to use dynamic scoring for all “major legislation” — and to provide just one estimate, rather than the range they’ve customarily provided for large-scale economic effects.

We’ve had rumors of this radical change ever since Republicans seemed like to gain control of the Senate, as well as hold onto their House majority. Fueling them was the expectation, proved correct, that Congressman Paul Ryan, who’s a fan of dynamic scoring, would become head of the House tax-writing Ways and Means Committee.

And we’ve had warnings of the consequences for even longer. Because dynamic scoring has been around for quite awhile.

How CBO and JCT score legislation might seem far removed from policies that affect poor and near-poor people in America. But it isn’t because dynamically-scored tax cuts can make prospective revenues seem greater than they’ll actually be.

Congress can then more easily make tax cuts that will drive the deficit upward — and so set the stage for spending cuts (except for defense) more severe than even those we’ve seen.

Brief explanation from a non-economist who believes she’s read enough to grasp the basics.

How CBO and JCT Score Legislation

When bills with any potential revenue impact are proposed, they’re sent to CBO for a score, i.e., estimates, over a 10-year period, of how the legislative changes will increase or reduce federal revenues. JCT gets involved when the bills are tax-related.

As the op-ed author, Professor Ed Kleinbard explains, the experts try to predict how people will respond and to fold the results of those responses into the scores.

Say, for example, some Congress members want to raise the gas tax. CBO and/or JCT would factor in the likelihood that some people would drive less. Buy more fuel-efficient cars too perhaps. And so the revenue estimates wouldn’t be as high as a straightforward addition of the extra paid at the pump if drivers kept buying as much gas as they do now.

Congressman Ryan is thus pulling the wool over our eyes when he claims that the current scoring method fails to “take into consideration behavioral changes or economic effects.” Ditto the far right-wing Heritage Foundation’s tax and policy guru, who asserts that the current method is “static.”

How Dynamic Scoring Differs

Economic models that produce dynamic scores include estimated impacts on the entire economy and the revenue consequences thereof.

In the case of tax cuts for individuals, they’d factor in broad assumptions about what people would do, e.g., work more because they could keep more of what they earned (or less for the same reason), buy and/or invest more, which could ramp up production, create jobs and, therefore, boost income tax collections.

Similar sorts of assumptions for business tax cuts.

What the models don’t do, Kleinbard says, is factor in the consequences of tax cuts that don’t trigger spending cuts or tax hikes later. Nor, he adds, do they include the negative effects on economic output that would result from less government spending.

CBO actually does sometimes estimate “feedback effects” on the overall economy. But, it says, they tend to be “small relative to the direct budgetary effects.” And, as I said above, it never offers a single macroeconomic impact estimate.

Not what the Republican tax-cutters want. As Citizens for Tax Justice says, they’re looking for something like the oft-debunked Laffer curve, which has been used to argue that tax cuts pay for themselves.

Implications of the One-Estimate Rule

All the responsible experts I’ve read emphasize the iffiness of dynamic scoring. Understandably, because as Kleinbard says, the models economist use involve a lot of assumptions about who will do what if taxes rise or fall.

The Center on Budget and Policy Priorities, which has been bird-dogging the issue, points out that JCT produced eight different estimates of the dynamic effects of just-retired Congressman Dave Camp’s tax reform plan.

They ranged from $50 billion to $700 billion in additional revenues over the first 10 years — or from another perspective, a 16-fold difference between the lowest and highest estimates of the increase in the total value of goods and services produced.

And which do you suppose Camp cited? Which do you suppose Republicans tax-writers would use if presented with the options?

But under the House rule, they wouldn’t be. They’d get just one — and instead of, rather than in addition to the conventional score that’s provided the basis for revenue estimates up until now. But only when they thought it would support their plans, since they could easily evade the “major legislation” standard when it wouldn’t.

And very importantly, they wouldn’t necessarily get the explanations for dynamic scores, as they have up until now. Which means that we wouldn’t have them either.

The model that produced the estimate Camp touted assumed that Congress would prevent the deficit from soaring by cutting transfer payments, e.g., Social Security, unemployment insurance, SNAP (food stamp) benefits.

One way or the other, the dynamic scoring gambit will ultimately feed arguments for cutting social insurance, safety net benefits and/or other programs that are properly viewed as investments, e.g., in science, infrastructure, public education. Like as not, all of the above.

That, Kleinbard concludes, “is what lies inside the Trojan horse of dynamic scoring.” And it’s why we everyday citizens ought to care about what seems so arcane.


Some Good Things That Happened This Month … and Some Bad

December 22, 2014

Well, you know the big good thing, of course. We didn’t have another government shutdown. And we’ve got a budget that will defer further Republican efforts to gut domestic spending until work on next year’s budget begins. Only a brief respite, however, from efforts to block the President’s recently-announced immigration enforcement policies.

You know some of the big bad things too, I suppose. Banks will again be allowed to invest federally-insured deposits — your savings and mine — in some risky derivatives, e.g., bets on the creditworthiness of borrowers.

And very wealthy people will be allowed to donate a whole lot more to the national political parties — a far less risky investment in election results and policy decisions that serve their interest.

For us who live in the District of Columbia, the override of our vote to legalize small-scale marijuana possession and production is a big bad thing too — if not in itself, then because it’s a grating reminder that Congress can meddle in our local affairs whenever it chooses.

Other good and bad things happened this month that didn’t get as much media attention. Here are four that follow through on issues I’ve been blogging about.

Funding for the National Housing Trust Fund

The National Housing Trust Fund will, at long last, have some money for grants to support the development and preservation of affordable housing — mostly rental housing for the very lowest-income households.

Brief review of the history for those who’ve lost track.

When Congress created the Fund, in 2008, it designated a certain percent of Fannie Mae and Freddie Mac’s new business as the main revenue stream. Well, you know what happened to them when the housing market tanked at about the same time.

Despite the recovery, the Federal Housing Finance Agency, which took over their affairs, preserved its freeze on their contributions to the Fund.

We’ve had a series of legislative proposals to create another revenue stream. Nothing’s come of any of them — or of the one-time financing the President has included in his proposed budgets.

Earlier this month, FHFA told Fannie and Freddie to begin transferring money to the Fund, as the law that created it envisioned. Hardly the be-all and end-all for the acute shortage of housing that affordable for extremely low-income people, but every bit helps.

A Boost for High-Quality, Affordable Child Care

The budget package Congress just passed includes an additional $75 million for the recently updated and improved Child Care and Development Block Grant. The increase will surely help, though, as CLASP says, far more will be needed.

States will have to spend more to carry out their mandated responsibilities, as my overview of the new block grant law noted. They’ll need even more funds to reverse the downward trend in the number of children with CCDBG-subsidized child care — fewer in 2012 than in any year since 1998.

But again, every bit helps. And it’s encouraging to see continuing bipartisan support for high-quality child care that’s affordable for low-income families, as it surely isn’t without a subsidy.

Another Funding Cut for the IRS

The just-passed budget package cut funding for the Internal Revenue Services by $346 million, leaving the agency with less, in real dollars, than in any year since 2000, when it had fewer tax returns to process and fewer responsibilities as well.

This is a good thing if you’re anxious about having your tax returns audited. Not a good thing if you want an IRS representative to answer questions so you can file an accurate return.

And a very bad thing indeed if you’re worried about insufficient funding for non-defense programs, including those intended to provide both opportunities and a safety net for low-income individuals and families.

Or, for that matter, if you’re worried about the deficit. And we who care about these programs should be, since it’s been used to justify harmful spending cuts, including, but not limited to those Congress has already passed.

Because less money for the IRS means less money to offset spending. The Treasury Department estimates that every $1 spent on enforcement yields a $6 return in revenues collected. Citizens for Tax Justice cites considerably higher ROI figures.

The latest funding cut seems likely to further reduce the number of audits the IRS conducts — especially the potentially high-yielding, complex audits of high-income individuals and big businesses.

Thus, says sharp-witted economist/blogger Jared Bernstein, the budget cut is “a way to cut taxes without explicit tax cuts.” And tax cuts without offsetting revenue-raisers mean a shrinking pot of money for the already-squeezed non-defense share of the budget.

Another Victory for the White Potato

Buried deep in the budget package, we find a provision that requires the U.S. Department of Agriculture to add white potatoes to the list of foods that states must and can include in their own WIC packages, i.e., what low-income mothers of young children can buy with their WIC coupons or the equivalent.

The coupons are supposed to supplement the family’s diet with nutrients it might otherwise not get enough of. So the list includes foods like whole-grain bread, low-fat dairy products and fruits and vegetables. These reflect recommendations by experts at the Institute of Medicine.

The IOM panel did not recommend white potatoes because, in its view, mothers and their young children already ate quite enough of them. The potato industry loudly protested. And Congress members from potato-growing states swiftly launched a series of maneuvers to insert white potatoes into the WIC list.

Now they’ve succeeded — a first-time-ever successful effort to override the scientific judgment the WIC list reflects. Not, however, the first time Congressional potato champions have successfully interfered with dietary guidelines for federally-subsidized meals.

Further proof, were any needed, that bipartisan isn’t always better.

NOTE: I’m painfully conscious that I’ve left out some noteworthy good things — and some bad as well. What would you add?

 


A “Turkey of a Tax Bill” That Could Be Back on the Table

December 1, 2014

Well, I said I expected there’d be a lot to piss me off. But I didn’t expect anything new of that sort before Thanksgiving Day. Nor did I expect the Senate’s Democratic leadership to actively contribute.

But here we are with reliable reports that about-to-be-former Senate Majority Leader Harry Reid, some of his colleagues and House Republicans were close to a deal that would, among other things, make 10 of the nominally temporary tax breaks (the so-called tax extenders) permanent law.

The costliest — the research and experimentation tax credit — would become more generous, reflecting changes the House had already passed. So would several other pieces of the package.

But the improvements the Recovery Act made in the Earned Income Tax Credit and the Child Tax Credit would be left to die in 2017, pushing some 16.4 million people into poverty — or deeper poverty.

Several White House spokespersons told the press that the President would veto the package because, said one, “it would provide permanent tax breaks to well-connected corporations while neglecting working families.”

Capitol Hill staffers reportedly say that queered the deal — at least, for now. But I rather doubt Congressional Republicans and Democratic collaborators will altogether give up on the deal-making.

The “turkey of a tax bill,” as the Coalition on Human Needs called it, would still be a turkey, even if the negotiators decided to placate the President and some high-ranking Democratic objectors by folding in the missing refundable tax credits. Doesn’t seem likely now, but just suppose.

Here are three big, related things that should set off alarm bells.

Revenue Losses. The package that the dealmakers had all but completed would have cost $409 billion over the first 10 years, according to Center on Budge and Policy Priority estimates. Citizens for Tax Justice pegs the cost at $450 billion.

But the cost would actually have been roughly $530 billion, once you tack on the additional interest the federal government would have had to pay because it would have had to borrow more.

All big costs — and all because the dealmakers decided not to offset the tax cuts with any revenue-raisers, spending cuts or some combination of the two. Think how some of that money could be used to shore up under-funded programs that serve the needs of poor and near-poor people.

Fodder for the Spending Slashers. Needless to say (I hope), such large revenue losses would drive up the deficit, if Congress did nothing to curb federal spending more than it already has.

But you can bet that Republicans, who had no problem with the unpaid-for tax cuts, would swiftly revert to insisting on additional, drastic federal spending cuts (except for defense) in order to balance the budget.

The rising deficit — and hence the debt — was one of Congressman Paul Ryan’s primary justifications for his budget plans. They proposed large funding cuts for safety-net programs and others that benefit low-income individuals and families, e.g., Pell grants.

They blew away the Social Services Block Grant and, of course, the Affordable Care Act, thus also the subsidies that enable low and moderate-income people to purchase affordable health insurance. They took stabs at Medicare and Social Security benefits.

So we can expect Republicans to turn the revenues they’d cheerfully forfeited, without a peep about the deficit, into more urgent reasons to slash social programs.

Thoroughgoing Tax Reform Preempted. As you know, Republicans and Democrats, from far-right to far-left, agree that the tax code is ripe for reform.

Differences notwithstanding, they apparently envision a clean-out of a whole lot of special interest and overlapping credits, deductions, deferrals, etc., with at least some of the savings used to offset the cost of other changes, e.g., a lower corporate tax rate. (Whether to use some or all is one of those differences.)

As I said, the “turkey” bill would have made 10 of the extenders permanent in advance of such reform — and without offsetting the revenues lost. This would lower the revenue baseline, i.e., the projected revenues the federal government will collect under current law.

So Congress would effectively get more than $400 billion to use for lowering tax rates and/or preserving some of those dubious special-interest tax breaks without having to find offsets.

A reform plan could thus qualify as revenue-neutral, i.e., one that neither raised nor decreased total revenues collected, only because the extender finesse had already decreased revenues.

For the end result, return to the previous section. And watch what happens after Congress does a last-minute, short-term extender save.

 


Major Anti-Poverty Measures at Risk and Could Be Better

October 20, 2014

Last week’s Supplemental Poverty Measure report confirmed at least one thing we already knew. The refundable tax credits lift more people out of poverty than any other major public benefit, except Social Security.

The more powerful of the tax credits — the Earned Income Tax Credit — boosted 6.2 million people, including 3.2 million children over the poverty threshold in 2013, according to the Center on Budget and Policy Priorities.

The Child Tax Credit did the same for 3.1 million people, including 1.7 million children, again per CBPP.

These tax credits have enjoyed broad bipartisan support, as well they might. The EITC in particular is said to serve as an incentive to work, for which there is some evidence. And who would  stand against help for working parents raising children?

We now have the germs of a bipartisan consensus on certain improvements to both. For example, both some leading Democrats and the Senate and Congressman Paul Ryan have proposed making more childless workers eligible for the EITC and increasing the credit for them.

Senators Marco Rubio and Mike Lee say they have a proposal that will, among other things, raise the Child Tax Credit, end the phase-out and make the credit refundable against payroll, as well as income tax liabilities. Fine print as yet to be seen.

And fine print could make a very big difference to low-income families — as well as some immigrant families, even if not low-income — as the now-passed House child tax reform bill shows.

Into the dialogue, if we can call it that, comes the Center for American Progress, with a set of recommendations — some already proposed by others, some new. Here’s a somewhat selective — and occasionally elaborated — summary.

Keep the Improvements We Have

First and foremost, CAP says, Congress should make the Recovery Act’s improvements in both the EITC and the CTC permanent law. Both are due to expire at the end of 2017. And thus far, Republicans in Congress have shown no inclination to extend them.

For the EITC, no extension would mean a reversion to a more severe “marriage penalty,” i.e., a lower credit (or no credit) for some workers who marry. It would also mean a stingier credit for families with three or more children.

For the CTC, no extension would mean no credit at all for very low-income working families. The current $3,000 threshold for claiming the credit would revert to what’s in the permanent law, with all the annual upward adjustments since 2001 — thus a threshold estimated at $14,700 for 2018.

And for those clearing the threshold, the refunds would shrink because they’re based on a percent of income over the threshold, up to $1,000 per child.

About 1.8 million people, including a million children would fall into poverty, CBPP warns. Far more would fall deeper into poverty — 14.6 million, including 6.7 million children.

Expand Eligibility for the EITC

CAP takes note of the disadvantages the EITC poses for childless workers — and for workers whose children haven’t lived with them for more than half the year. They’re actually at a double disadvantage, it says, because some research suggests that employers take account of the EITC in setting wage rates.

It endorses, in general terms, an expanded credit for them. Also a lower age for eligibility. But instead of the commonly-mentioned 21, it favors 18, provided that the workers’ parents don’t claim them as dependents.

Boost Child Tax Credit Refunds

CAP wants the CTC to become fully refundable, as the EITC already is. Families would then receive refunds for the total amount that the credit, plus whatever other credits and deductions they can claim reduce their tax liability to less than zero.

It also recommends indexing the credit to keep pace with inflation. This would achieve somewhat the same results as the already-indexed provisions of the EITC do.

But the CTC would still have the same $3,000 threshold, whereas workers can claim the EITC, no matter how little they earn. The Tax Policy Center has recommended eliminating the threshold, a reform also advocated by others.

Change Other Policies to Promote Financial Stability and Upward Mobility

CAP has several recommendations to make it easier — and more attractive — for workers to save at least part of their EITC refunds. Several others would make it easier — and less costly — for workers to improve their earning prospects by getting a college education or job training.

All but one of these reaches beyond the EITC itself. And none can be properly summarized in a paragraph or two. Those interested can find the asset-building recommendations here and the education recommendations here.

CAP does, however, have a financial stability proposal strictly for the EITC — a partial early refund. Workers could initially receive up to $500 of the refund they were already eligible for during the second half of the tax year — more in later years because the limit would rise with the inflation rate.

This, CAP says, would help them pay for unusual expenses, e.g., a car repair, moving costs, without resorting to payday loans or the newer, equally extortionate auto title loans.

An estimated 21% of eligible workers don’t claim the EITC. Various reasons for this, including the complexities of filing. Perhaps more would if the “rainy day fund” proposal, as Generation Progress calls it, were adopted.

But if Congress has to pick and choose, then I think it should give top priority to making the temporary improvements permanent — and to giving childless workers a fair shake.

 


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