The tax system provides substantial assistance for workers – and, outside of Social Security, provides the largest platform for redistribution we have in the U.S. Although the tax system leaves out huge swaths of people – which I’ll discuss in future posts – for the people it targets money towards, it can do it relatively efficiently.
The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) provide subsidies for low-income and middle-income families. Almost all benefits from both of these
credits go to families with children. In 2011, the EITC will likely deliver $57.5 billion in tax credits. The credit phases in with earnings until the maximum credit is reached ($3,094 for families with 1 child, $5,112 for families with 2 children, and $5,751 for families with at least 3 children). The credit remains constant for a period until it is reduced for each additional dollar of earnings until no credit remains. The Center on Budget and Policy Priorities estimates that in 2009, the EITC lifted 6 million people out of poverty. It rivals food stamps in total size, and swamps traditional welfare programs. Roughly three-quarters of its benefits go to families in the lowest two income quintiles. The credit is fully refundable, so the credit can work to both reduce taxes owed and provide a credit beyond those taxes, resulting in a net tax refund.
The Child Tax Credit (CTC) provides up to a $1,000 credit for each child in a family. Like the EITC, the CTC phases in. Parents receive 15 cents for each dollar of earnings above a defined threshold ($3,000 in 2011) until their maximum credit is reached. The credit also offsets taxes owed. Although the CTC provides total benefits similar to the EITC ($52 billion projected for 2011), the benefits are much less targeted than the EITC, with a third of benefits going to families with incomes in the lowest two quintiles.
As it stands, the EITC and CTC provide a substantial portion of assistance available to low- and middle-income families. They are the defacto safety net for many – and no surprise, they are threatened by the cast of Republican characters running for president. Almost all of the tax plans, to date, eliminate the refundable credits. Bachman wants to make sure everyone is paying taxes (never mind that the people not paying income taxes are typically older Americans who don’t have earnings or low-income families), Herman Cain and his 9-9-9 plan eliminates refundable credits, Newt and Perry want a flat tax that eliminate all refundable credits. Huntsman will do away with these credits, and I’m not holding my breath for Paul to come through with any broad based assistance for low-income families.
Tax reform should be on the table in this election – but not this kind. As long as our safety net is delivered in large part through the tax system, we have to keep our eyes fixed to what’s happening to it – lest we wake up some morning with a new tax system that doesn’t just provide big tax breaks for corporations and the wealthy but – but literally takes away the only assistance low- and middle-income workers can receive.