Using Refundable Tax Credits to Help Lowincome Taxpayers

Using Refundable Tax Credits to Help Lowincome Taxpayers by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma & ATAX Fellow, UNSW University of Melbourne, Australia August 16, 2011

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U. S. : Share of Household Income & Gini Index, 2005 Quintiles Lowest Second Middle Fourth Highest Gini Index Market income Disposable income 1. 50 7. 26 14. 00 23. 41 53. 83 0. 493 4. 42 9. 86 15. 33 23. 11 47. 28 0. 418 3

Rising Inequality 4

Inequality and Redistribution Country Australia Canada Mexico Sweden United Kingdom United States OECD Gini Before 0. 46 0. 44 Gini After 0. 32 Poverty Before (50% of median income) 28. 6 23. 1 Poverty After (50% of median income) 12. 4 12. 0 n/a 0. 43 0. 47 0. 23 21. 0 26. 7 18. 4 5. 3 20. 6 49. 1 7. 0 29. 4 0. 46 0. 45 0. 34 0. 38 0. 31 26. 3 26. 4 8. 3 17. 1 10. 6 37. 1 28. 0 35. 9 21. 3 15. 9 20. 5 Tax Social % Spending GDP %GDP 30. 6 17. 1 33. 3 16. 5 5

U. S. Average Annual Earnings of Full-time Workers, 2008 Doctors (Family & GP) Lawyers Economists Nurses (RN) Police Auto mechanics Secretaries Garbage collectors Orderlies Waiters and waitresses $161, 490 124, 750 90, 830 65, 130 52, 810 38, 967 29, 990 37, 540 24, 620 19, 580 6

Distribution of Earnings, 2004 7

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Redistribution through Cash Transfers & Taxes Australia Canada Korea Sweden United Kingdom United States OECD-23 Transfers Taxes from Net transfers to lowest quintile 5. 9 0. 2 5. 8 3. 5 0. 6 2. 9 0. 5 0. 4 8. 5 2. 8 5. 7 4. 6 2. 3 5. 4 http: //dx. doi. org/10. 1787/422058728151 0. 4 1. 2 4. 1 1. 9 4. 2 11

U. S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2011 Standard deduction Unmarried individuals $5, 800 Married Heads of couples filing household joint returns with one with two children $ 8, 500 $11, 600 Personal exemptions $3, 700 $ 7, 400 $14, 800 Simple income tax threshold $9, 500 $15, 900 $26, 400 Rev. Proc. 2011 -12, 2011 -2 IRB 297, http: //www. irs. gov/pub/irs-irbs/irb 11 -02. pdf. 12

Tax Rate Schedules for Various Taxpayers, 2011 Tax rate 10 15 25 28 33 35 Rate bracket Unmarried individuals $0 to $8, 500 to $34, 500 to $83, 600 to $174, 400 to $379, 150 Over $379, 150 Heads of household with one child $0 to $12, 150 to $46, 250 to $119, 400 to $193, 350 to $379, 150 Over $379, 150 Married couples filing joint returns with two children $0 to $17, 000 to $69, 000 to $139, 350 to $212, 300 to $379, 150 Over $379, 150 Rev. Proc. 2011 -12, 2011 -2 IRB 297, http: //www. irs. gov/pub/irs-irbs/irb 11 -02. pdf. 13

Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, http: //finance. senate. gov/imo/media/doc/120210 DEtest. pdf. 14

Center on Budget and Policy Priorities, Top Ten Tax Charts (April 14, 2011), http: //www. offthechartsblog. org /top-ten-tax-charts/. 15

Productivity and Real Income 20 Facts About U. S. Inequality that Everyone Should Know, http: //stanford. edu/group/scspi/cgi-bin/facts. php. 16

Rising Poverty U. S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P 60 -238, September 2010), http: //www. census. gov. 17

Earned Income Tax Credit (EITC) Increase o Relatively new credit percentage for 3 or more qualifying children n I. R. C. § 32 n Temporary increase 2009 -2010, extended 2011 -2012 n 45% of earnings (up from 40%) o Maximum credit increased to $5, 751 in 2011 o Maximum AGI increased to $49, 078 in 2011 Rev. Proc. 2011 -12, 2011 -2 IRB 297, http: //www. irs. gov/pub/irs-irbs/irb 11 -02. pdf. 18

Child Tax Credit o $1, 000 per qualifying child n I. R. C. § 24 o Temporary expansion of eligibility for refundable credit (15% × earned income minus $3, 000 threshold) o More lower income families qualify: n 2008 – threshold amount was = $8, 500 n 2009 -2012 – threshold amount = $3, 000 19

Poverty Levels & Net Federal Tax Thresholds, 2010 1. Poverty levels 2. Simple income tax threshold (before credits) 3. Income tax threshold after credits 4. Employee payroll tax threshold 5. Combined income & payroll tax threshold Unmarried Single Married individual parent w/ 1 couple w/ 2 couple w/ 3 children $10, 830 $14, 570 $22, 050 $25, 790 $9, 350 $15, 700 $26, 000 $29, 650 $13, 395 $32, 380 $50, 250 $60, 567 $0 $0 $9, 348 $25, 717 $38, 635 $43, 788 20

Taxes at Poverty Level, 2010 Unmarried individual 1. Poverty levels 2. Income tax at poverty level (after credits) 3. Employee Social Security & Medicare tax at poverty level 4. Combined income & payroll tax at poverty level 5. Combined tax as a % of income at poverty level Single Married parent w/ couple w/ 2 couple w/ 3 1 children $10, 830 $14, 570 $22, 050 $25, 790 -$453 -$4, 450 -$7, 712 -$8, 554 $829 $1, 115 $1, 687 $1, 973 $376 -$3, 335 -$6, 025 -$6, 581 3. 5% -22. 9% -27. 3% -25. 5% 21

Net Federal Tax Liabilities for Selected Households, 2010 $15, 000 Unmarried Individual Head of Household, 1 Child 0 00 0, $5 0 00 0, $4 Married Couple, 3 Children 0, $3 $0 0, $2 Married Couple, 2 Children 0, $1 $5, 000 $0 Tax Liability $10, 000 -$5, 000 -$10, 000 Income 22

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Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) Social Security Medicare Medicaid Unemployment compensation Supplemental Security Income Earned income tax credit Child tax credit Making work pay tax credit Food assistance Family support Housing assistance General retirement and disability Federal employee retirement and disability Veterans benefits and services 2009 actual $678 425 251 119 41 42 24 <1 72 26 10 8 118 49 2015 estimate $893 651 336 65 52 45 26 n/a 89 25 5 10 141 8426

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Canada 2010 o Canada Child Tax Benefit (CCTB) n C$112. 33 for each child under age 18 o National Child Benefit Supp. (NCBS) n Up to C$174. 00 per month o Child Disability Benefit (CDB) n Up to C$205. 83 per month o Universal Child Care Benefit (UCCB) n C$1, 200 per year for children under 6 28

Canada, cont. o Working Income Tax Benefit (WITB) n refundable tax credit of 25% of earned income in excess of C$3, 000 n maximum of C$925 for individuals (C$1, 680 for single parents and couples) o Refundable Goods and Services Tax Credit n C$250 for taxpayer, spouse or partner n C$131 for each child 29

United Kingdom 2010 o Child Benefit n £ 20. 30/week oldest child; £ 13. 40 others o Child Tax Credit n £ 545 per year/family+ £ 2, 300/child o Working Tax Credit n £ 1, 920 per year per worker n + 80% × child care, up to £ 140/week for 1 child; £ 240/week for 2+ children 30

Australia 2010 o Family Tax Benefit n Part A: up to A$4, 905. 60 child under 13; A$6, 161. 20 child 13 -15; etc. n Part B: extra help for low-income single parents & families with one main income o Baby Bonus n $5, 294, paid in 13 fortnightly installments o Child Care Tax Rebate n 50 percent of out-of-pocket child care 31

Australia 2011: Add a Carbon Tax, but: o Triple the tax-free threshold to $18, 200 n Which will replace all but $445 of the low -income tax offset (LITO) n Improve work incentives @ low incomes n Remove one million taxpayers o Increase Government payments n Pensions, allowances and Family Tax Benefit http: //www. cleanenergyfuture. gov. au/wp-content/uploads/2011/07/securing-a-clean-energy-future -summary. pdf 32

Securing a Clean Energy Future http: //www. cleanenergyfuture. gov. au/wp-content/uploads/2011/07/securing-a-clean-energy-future -summary. pdf 33

http: //www. futuretax. gov. au/content/Tax. Forum/discussion_paper/tax_forum_next_steps_for_Austr alia_20110729. pdf 34

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How an Integrated Tax & Transfer System Would Affect a Single Parent with 2 Children ($2, 000 Personal Tax Credits, $2, 000 per Worker Credits, and 20 & 35% Tax Rates) Pre-transfer Plus personal earnings tax credits 0 $10, 000 $20, 000 $50, 000 $100, 000 $200, 000 $6, 000 $6, 000 Plus worker credit Less tax imposed After-tax income 0 $2, 000 $2, 000 $4, 000 $10, 000 $27, 500 $62, 500 $6, 000 $16, 000 $24, 000 $48, 000 $80, 500 $145, 500 40

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About the Author o Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law and the author of Making America Work (Washington, DC: Urban Institute Press, 2006). o Jon was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009 -2010 academic year. o Jon can be reached at jforman@ou. edu, +1 -405 -3254779, www. law. ou. edu/faculty/forman. shtml. 42