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.


Tax-Credit Bill Would Help Low-Income Families Facing Higher Rents

April 17, 2014 at 2:48 pm

House Ways and Means Committee member Charles Rangel (D-NY) has introduced legislation to establish a new federal tax credit to help low-income renters afford housing.  As we’ve explained, a renters’ credit along these lines would be a valuable tool to address low-income families’ mounting housing needs.

As the graph shows, the typical or median rent has risen much faster than inflation over the last decade, while renters’ median income has fallen in inflation-adjusted terms.

In fact, in 90 cities around the country, a median-income resident would have to pay more than 30 percent of his or her income to afford the median rent, the New York Times reports.  (The federal government and many private-sector landlords and lenders consider housing unaffordable if it exceeds 30 percent of household income.)

As a result, families with incomes well below the median must pay high and growing shares of their income for rent or live in substandard, overcrowded, or unstable housing arrangements.  In 2011, 8.5 million families with incomes under half of the local median received no rental assistance and either paid more than half of their income for housing or lived in severely substandard conditions, according to the Department of Housing and Urban Development — an increase of more than 40 percent since 2007.

And Department of Education data show that 1.17 million school-age children were homeless during the 2011-2012 school year.

Despite these needs, the federal government provides much more help to higher-income homeowners, through tax subsidies like the mortgage interest deduction, than to low-income renters.  Due to funding limitations, Housing Choice Vouchers and other low-income rental assistance programs reach fewer than one in four eligible families.

The Rangel proposal would help address that imbalance by giving states about $5.8 billion in annual tax credits to distribute among low-income renters based on federal income eligibility rules and state policy priorities.  We estimated last year that a credit similar to the Rangel proposal (but with added provisions to ensure that most of its benefits go to the neediest families), capped at $5 billion, would help 1.2 million households, reducing their rent by an average of $400 a month.

The renters’ credit would complement the Low-Income Housing Tax Credit (LIHTC), which Representative Rangel helped enact in 1986.  LIHTC is an effective subsidy for building and rehabilitating affordable housing but doesn’t typically make housing affordable to the poorest Americans by itself.  A renters’ credit could help these households afford rents in developments subsidized through LIHTC and in other buildings.

If the President and Congress move forward on tax reform, they should use savings from scaling back other tax expenditures to establish a renters’ credit along the lines that Representative Rangel proposes.

Increase the EITC to Help Lift “Childless Workers” Out of Poverty

April 15, 2014 at 3:21 pm

It’s time for policymakers to fix a glaring hole in the Earned Income Tax Credit (EITC), as I explain today in an op-ed for National Journal:

While the tax credit reduces poverty among families with children by double-digit percentages, as a recent Congressional Research Service report found, it does little or nothing to help low-wage workers who aren’t raising minor children. A “childless adult” working full time at the minimum wage — an annual income of just $14,500 — earns too much to receive the credit.

As a partial result of the now-limited EITC, childless workers are the sole group of workers that the federal tax system pushes into — or in many cases, deeper into —poverty.

Indeed, as we detail in a new paper, about 7 million childless workers are taxed into or deeper into poverty by federal taxes (see chart).

Increasing the EITC for childless workers, as the President and many in Congress have proposed, can help address this problem.  Making more childless workers eligible for the EITC — including those working full time at the minimum wage — and boosting the credit for workers who are now eligible would significantly lessen the degree to which the tax code increases poverty among these workers.

And, as I explain in National Journal, expanding the EITC for childless workers will actually help many families:

Many so-called “childless workers” are non-custodial parents who have financial and parenting obligations. The President’s proposal to expand the EITC would benefit about 1.5 million non-custodial parents. Their children do better when these parents are working and are a positive force in their lives.

Additionally, many childless workers are future parents. Extending the EITC’s pro-work benefits to them would boost their incomes today while improving their future ability to provide for their children. And a child’s success also depends on his or her extended family and community. A stronger EITC for “childless” adults can support children’s siblings, uncles, aunts, and grandparents, who may be considered “childless” for tax purposes even if they live in the same home as their younger relatives. By helping to increase work, and possibly improve marriage rates and reduce crime, a stronger EITC can also help strengthen the communities in which children live.

Click here to read the National Journal op-ed and here to read our full paper on the EITC for childless workers.

3 Million Reasons to Thank Tax-Season Volunteers

April 15, 2014 at 11:35 am

This tax season, 85,000 trained volunteers across the country have helped file more than 3 million federal tax returns free of charge for low- and moderate-income people.  Tax Day is the perfect time to reflect on the critical services that these volunteers provide.

Free tax preparation programs such as the Internal Revenue Service’s (IRS) Volunteer Income Tax Assistance (VITA) and the AARP Foundation’s Tax-Aide programs are national efforts to provide professional tax filing assistance to low-income households.

Together, the VITA and AARP programs operate more than 10,000 sites across the country.  Volunteers are certified to work with clients after undergoing hours of training.  As early as January, the volunteers help clients complete their returns, review them for accuracy, and submit them electronically.  In addition to helping taxpayers file their returns accurately, volunteers help clients claim all the tax credits they’ve earned, such as the Earned Income Tax Credit and the Child Tax Credit, which help workers meet day-to-day needs and care for their families.

The volunteers’ work is a critical service to these working families — but it doesn’t end on April 15.  After today’s deadline, volunteers will continue to help with late filers and post-tax season tasks, such as identifying new locations for the tax preparation services and contacting employers to spread the word about the services, following up with clients to connect them to community and social services, or providing financial education classes.  And, CBPP’s Tax Credit Outreach website will continue to serve as a reference for these volunteers and organizations hosting free tax filing sites to support these efforts.

These volunteers have made it possible for millions of low- and moderate-income people to file their taxes by April 15 — and to claim the tax credits they’ve earned.  There’s no better day than Tax Day to say thank you.

The Top 10 (Well, 11) Federal Tax Charts

April 15, 2014 at 11:05 am

To usher in Tax Day, here are our top 11 charts on federal taxes, which provide context for debates on issues like tax reform and deficit reduction.

Our first chart shows the sources of federal tax revenue.

Individual income tax revenues have held steady for many decades at a little under half of federal revenue.  The share of federal revenue from payroll taxes (mostly Social Security and Medicare taxes) grew sharply between the 1950s and 1980s and has since remained relatively stable.  Conversely, the share of federal revenue from corporate taxes fell sharply between the 1950s and 1980s and has remained at this lower level.

Our second graph reminds us what those taxes pay for.

Social Security, major health programs like Medicare and Medicaid, and national defense account for roughly two-thirds of federal spending.  Safety net programs (such as unemployment insurance and nutrition programs) and interest on the debt account for 12 percent and 6 percent of federal spending, respectively.  The remaining 18 percent goes to such other areas as roads, education, and health and science research.

The United States is a relatively low-tax country, as the chart below shows.  When measured as a share of the economy, total government receipts (a broad measure of revenue) are lower in the United States than in any other member of the Organisation for Economic Co-operation and Development (OECD), even after accounting for the modest revenue increases in the 2012 “fiscal cliff” deal and the taxes that fund health reform.

While high-income filers pay a large share of the nation’s taxes, the main reason is that they receive a large share of the nation’s income.  Moreover, focusing solely on the income tax — among the most progressive taxes — gives a distorted picture of the full set of taxes that different income groups pay.

The chart below provides a more complete picture.  It shows the share of all federal, state, and local taxes that each income group pays and what share of the nation’s income it collects.  As the graph shows, incomes in the United States are extremely polarized, and the overall tax system is only modestly progressive.  For example, the top 1 percent of earners received 22 percent of the nation’s income in 2013 and paid 24 percent of all taxes; the bottom 60 percent of people received 21 percent of the income and paid 17 percent of the taxes.

This largely reflects the fact that average tax rates increase modestly as you move up the income scale.  On average, the bottom 20 percent pays 19 percent of their income in taxes; the middle 20 percent pays 27 percent, and the top 20 percent pays 32 percent, according to Citizens for Tax Justice.

Policymakers considering tax policy changes should keep the economic context in mind, including the dramatic increase in inequality in recent decades.  Congressional Budget Office data show that incomes grew at much faster rates for high-income people than for everyone else between 1979 and 2010 (the most recent year available).

As the chart below shows, the average middle-income family had $9,500 less after-tax income in 2010, and the average household in the top 1 percent had $481,800 more, than if all groups’ incomes had grown at the same rate since 1979.

Many low-wage workers struggle to climb the economic ladder, particularly workers who are not raising minor children — the sole group that the federal tax code taxes into (and deeper into) poverty, as the chart below shows.  Often called “childless workers” — though many are non-custodial parents who have financial obligations to their children and play an important role in their lives — they pay substantial payroll taxes and begin paying income taxes while earning less than the poverty line (about $12,000 for a single worker).  The Earned Income Tax Credit (EITC) for these workers is far too small to offset their income and payroll tax liabilities.

The average childless worker who receives the EITC gets just $264, a small fraction of the EITC that other low-wage workers receive, as the chart below shows.  Moreover, childless workers under age 25 are ineligible for the EITC.

There are recent signs of bipartisan momentum to provide a meaningful EITC for childless workers.  President Obama as well as key House and Senate members have advanced proposals that would take a major step forward.  As the chart below shows, the EITC for a childless worker making poverty-level wages would rise from $171 to $841 under the President’s plan.  Moreover, the Treasury Department estimates that the President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for about another 10 million, under a poverty measure that includes the cash value of tax credits and benefit programs.  The congressional proposals are larger, and so would likely have larger anti-poverty effects.

Recent deficit-reduction measures, including the 2011 Budget Control Act’s funding caps and automatic cuts under sequestration, have been heavily tilted to spending cuts, rather than revenue increases.

If sequestration remains in place, 77 percent of the deficit reduction over 2015-2024 resulting from policy changes will come from spending cuts.  Just 23 percent will come from increased revenues, as the chart below shows. 

Policymakers agreed on a bipartisan basis last December to offset the cost of partially lifting sequestration for 2014 and 2015.

By contrast, however, the Senate Finance Committee has approved a package of “tax extenders” (expiring tax breaks, mostly for corporations) without offsetting the cost.  If continued for the next decade without offsets, the extenders would cost $484 billion.  That’s the equivalent of giving back more than half of the revenue savings from the 2012 “fiscal cliff” deal, which raised tax rates on very high-income taxpayers, as the chart below shows.  And if policymakers also continue the “bonus depreciation” tax for businesses — mistakenly in our view — the ten-year cost rises to $747 billion, wiping out nearly all of the fiscal-cliff savings.

Policymakers can reduce the deficit or finance investments by scaling back costly and inefficient “tax expenditures,” or spending delivered through the tax code in the form of tax credits, deductions and exclusions.

For example, House Ways and Means Chairman Dave Camp’s recent tax reform plan outlined dozens of specific cuts in tax subsidies.

As the chart below shows, tax expenditures cost well more than Social Security and also than Medicare and Medicaid combined.  Harvard economist Martin Feldstein, former chair of President Reagan’s Council of Economic Advisers, has said that “cutting tax expenditures is really the best way to reduce government spending.”

Tax Day Roundup, 2014

April 14, 2014 at 4:56 pm