The Center's work on 'Federal Tax' Issues

The Center analyzes major tax proposals, examining their likely effects on the economy and on the government’s ability to address critical national needs, especially over the long term. We place particular emphasis on the effects of tax proposals on households at different income levels. In addition, we analyze trends in the level of federal revenues, income distribution, and tax burdens.


New Poverty Figures Show Impact of Working-Family Tax Credits

October 17, 2014 at 2:05 pm

The Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) together lifted 9.4 million people out of poverty in 2013 and made 22.2 million others less poor, our analysis of Census data released yesterday show (see first graph).

Using Census’ Supplemental Poverty Measure (SPM), which includes taxes and non-cash benefits as well as cash income, our analysis shows how critical these tax credits are for low-income families.  It also highlights the impact if policymakers let key provisions of the credits expire, as I explain below.

Each credit plays an important antipoverty role.  The EITC lifted 6.2 million people out of poverty in 2013, including 3.2 million children.  The CTC lifted 3.1 million people out of poverty, including 1.7 million children.  Both credits acting together lifted some additional people out of poverty.

The EITC and CTC combined lift more children out of poverty than any other antipoverty program.

Unfortunately, critical provisions of the EITC and CTC are set to expire at the end of 2017.  If that happens, 16.4 million people — including 7.7 million children — will fall into or deeper into poverty, we estimate based on the Census data.  (See second graph.)  Our interactive calculator lets you explore what’s at stake for low-income families if policymakers don’t act.

Join Jared Today to Discuss Ways to Reduce Poverty

October 9, 2014 at 10:35 am

CBPP Senior Fellow Jared Bernstein will participate in a TalkPoverty LIVE! online panel discussion at 2:00 today on three policies to reduce poverty and increase economic security:

  • Raising the minimum wage and strengthening the Earned Income Tax Credit, or EITC;
  • Addressing erratic work schedules to make it possible to balance work and family;
  • Reforming the criminal justice system and re-entry policies so that criminal records do not resign people or their families to a life of poverty.

Other panelists include the Center for Law and Social Policy’s Jodie Levin-Epstein and the Southern Coalition for Social Justice’s Daryl Atkinson.  The Center for American Progress’s Rebecca Vallas will moderate.

Viewers can participate through tweets to @TalkPoverty with the hashtag #talkpovertylive and posts on the TalkPoverty.org Facebook page during the conversation.

What Would Congress’s Inaction Cost Working Families? Find Out.

October 8, 2014 at 2:05 pm

Unless Congress acts, key Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) provisions will expire at the end of 2017, pushing 17 million people — including 8 million children — into or deeper into poverty.  As we’ve noted here and here, making these provisions permanent should be a key priority for Congress.

Our new interactive calculator, below, allows you to explore what’s at stake for low- and moderate-income families if three important provisions expire at the end of 2017:

CTC refundability threshold

Current provision:  The CTC is worth up to $1,000 per child, and families have to work to qualify for it.  A family needs to earn at least $3,000 before beginning to earn the portion of the CTC that can be received as a tax refund.  The refundable CTC gradually phases in as earnings rise above that level. A family with two children cannot qualify for the full CTC unless their earnings reach $16,330.

In 2018, without action:  The $3,000 earnings threshold will more than quadruple to $14,700, so families with earnings between $3,000 and $14,700 will lose their entire CTC.  As the interactive below shows, a single mother who works full time at the minimum wage (earning $14,500) would see her CTC fall by $1,725, to $0 — a real hit to her ability to afford the basics.  To qualify for the full CTC, a married couple with two children will need earnings of at least $28,030, so many families that will still qualify will see their credits cut substantially.  About 3.7 million families, including 5.8 million children, will lose their entire CTC, and an additional 5.2 million families, including 10.6 million children, will lose part of their CTC, Citizens for Tax Justice (CTJ) estimates.

EITC marriage penalty relief

Current provision:  The EITC now begins to phase down at an income level that’s $5,000 higher for married couples than for single filers.

In 2018, without action:  The EITC for married couples will begin to phase out only $3,000 above single filers’ phase-out level, cutting the EITC for many low-income married filers and increasing the EITC’s marriage penalty for two-earner families.

EITC boost for larger families

Current provision:  Families with three or more children can qualify for a maximum EITC that’s about $650 larger than for families with two children.

In 2018, without action:  The maximum EITC for families with three or more children will be cut to the same maximum EITC as families with two children.

With the loss of these two key EITC provisions, 6.5 million families, including 15.9 million children, would lose some or all of their EITC, CTJ estimates.

This calculator does not show the impact of the American Opportunity Tax Credit, a credit to defray the costs of college, which is also set to expire at the end of 2017 under current law.  Its expiration would mean the loss of tax credits for college for about 11 million families with students.

4 Questions About Lee-Rubio Tax Plan

October 6, 2014 at 4:18 pm

With tax reform potentially on Congress’ agenda next year, the tax plan that Senators Mike Lee (R-UT) and Marco Rubio (R-FL) sketched out recently will merit a close look.  Its marquee proposal would supplement the current Child Tax Credit (CTC) with an additional credit of $2,500 per child.  We can’t evaluate the plan, which the senators say “won’t only help revive the American dream, but also make it more attainable for more Americans than ever before,” until they provide the details.  Here are four things we’d like to know about its changes to the CTC and the other major tax credit for working families, the Earned Income Tax Credit (EITC).

  1. Would “stock clerks” with children receive the new child tax credit?  Lee and Rubio write that Americans “see an economy that benefits stockholders but not stock clerks.”  But another tax plan that Senator Lee released in the spring, which also featured an additional child tax credit, denied the new credit to many working-poor families even though high-income families with children would have benefitted.
  1. Would low-income families keep their current Child Tax Credit?  Under the prior Lee plan, a single mother who works for the minimum wage and has two kids would have lost $1,725 in existing CTC benefits because the plan let key improvements to the existing CTC (as well as the EITC) expire in 2018.  But a millionaire with two children would qualify for a new child credit worth more than $5,000.
  1. Would the plan’s “retooling” of the EITC reduce poverty?  Lee and Rubio promise to “retool” the EITC in combination with means-tested programs (like SNAP, formerly food stamps), saying that the phasedown of these benefits in response to higher earnings creates high “marginal tax rates.” As we’ve explained, though, changes to reduce these marginal tax rates can also shrink needed assistance to poorer families — or increase program costs.  The EITC and CTC together lift more children out of poverty than any other program; “reform” can mean a lot of things, so when the details are available, we’ll be looking at whether the plan cuts assistance to the neediest families, thereby worsening poverty, or is structured to reduce poverty.
  1. Will the plan expand the EITC for childless workers, as leading members of both parties favor?  Working adults who aren’t living with and raising children are the only group that the federal tax system taxes into (or deeper into) poverty.  President Obama and House Budget Committee Chair Paul Ryan (R-WI) have both proposed expanding the EITC for this largely left-out group.

Several months before releasing his tax plan this spring, Senator Lee called for tackling the “opportunity crisis” of “immobility among the poor,” “insecurity in the middle class,” and “cronyist privilege at the top” and promised that his tax plan would address these problems.  But when the details finally appeared, they didn’t live up to his speech.  Let’s hope this time’s different.

Ryan’s Call for “Dynamic Scoring” in Tax Reform Would Invite More Mischief

October 3, 2014 at 2:18 pm

“The reality of tax reform . . . is that any politically feasible plan to scale back tax benefits doesn’t generate enough money to significantly cut tax rates without increasing the deficit,” my latest post for U.S. News’ Economic Intelligence notes.  “Rather than grapple with this reality, . . . House Budget Committee Chairman Paul Ryan invoked the last refuge of supply-side tax cutters in recent comments about how to proceed with tax reform.”  Specifically:

Ryan wants to change long-established methods for estimating the revenue effects of proposed tax changes that the Congressional Budget Office and Joint Committee on Taxation use to “score” the budgetary effects of such legislation.  Ryan . . . badly mischaracterizes existing revenue estimation methods while ignoring the fatal flaws in requiring budget crunchers to use so-called dynamic scoring.

Contrary to Ryan’s claim, current revenue estimates reflect many kinds of changes in households’ and business’ behavior resulting from proposed policy changes.  But they don’t reflect possible changes in the overall level of economic activity that might result from proposed legislation — and with good reason:

First, estimates of the macroeconomic effects of tax changes are highly uncertain.  Second, the most credible estimates usually show changes that are quite small.  Finally, and quite importantly, dynamic scoring would impair the credibility of the budget process because the resulting budget estimates will inevitably be controversial and subject to political manipulation.

Adopting dynamic scoring for tax reform, my post concludes, is a gimmick that would only invite more mischief.