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.

Helping Eligible Workers Claim the EITC

January 30, 2015 at 11:18 am

Some 21 percent of workers who qualify for the Earned Income Tax Credit (EITC) don’t claim it, the IRS estimates, and the IRS and its partners have designated today as the 9th annual EITC Awareness Day to spread the word about the EITC through public events and engaging the media.

As our Working-Family Tax Credit Essentials series explains, the EITC and Child Tax Credit reward work and reduce poverty. Research also shows that they help people in working families at every stage of life, from infancy through retirement.

CBPP conducts a National Tax Credit Outreach Campaign to promote the tax credits and provide free tax filing assistance year-round.  The campaign consists of thousands of community and social service organizations, government agencies, and employers working together to inform potentially eligible workers about the EITC, how to claim it, and where to find free tax filing assistance.

The campaign website has several resources, including:

Visitors can also request a complimentary copy of the Tax Credit Outreach Kit in the mail.

Paul-Boxer Repatriation Tax Holiday Can’t Pay for Highways

January 29, 2015 at 4:48 pm

Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) just proposed a “repatriation tax holiday,” which would allow U.S.-based multinational corporations to bring profits they hold overseas back to the United States at a temporary, vastly reduced tax rate.  They claim it would not only “boost economic growth and create jobs” but also raise revenues to pay for extending the Highway Trust Fund.  In reality, it wouldn’t do either.

A repatriation holiday enacted a decade ago proved a dismal economic failure.  As our paper explains, a wide range of studies — by the National Bureau for Economic Research, Congressional Research Service, Treasury Department, and outside analysts — found no evidence that it produced any of the promised economic benefits, such as boosting jobs or domestic investment.

Moreover, a repatriation holiday would lose billions of dollars after the first two years, so it can’t “pay for” highway construction or anything else.  A new repatriation holiday would lose $96 billion over 11 years, the Joint Committee on Taxation (JCT) estimated last year (see graph).  The Paul-Boxer proposal has a somewhat higher “holiday” tax rate on those overseas profits than the one JCT analyzed (6.5 percent versus 5.25 percent) so it might lose less revenue.  But it wouldn’t raise money.  And it would make our long-term fiscal challenges harder.

A repatriation tax holiday would boost revenues in the first couple of years, as companies rushed to take advantage of the temporary low rate.  But it would bleed revenues for years and decades after that.  As JCT explained, the biggest reason is that a second holiday would encourage companies to shift more profits and investments overseas in anticipation of more tax holidays, thus avoiding taxes in the meantime:

A second repatriation holiday may be interpreted by firms as a signal that such holidays will become a regular part of the tax system, thereby increasing the incentives to retain earnings overseas rather than repatriating those earnings and to locate more income and investment overseas.

To be clear, a repatriation holiday is very different from a transition tax on overseas profits, such as the proposal from former House Ways and Means Chairman Dave Camp.  Any future corporate tax reform package would likely include a transition tax on existing foreign profits to clean the slate of existing tax liabilities.  But a transition tax would be mandatory:  multinationals would have to pay U.S. taxes on their foreign profits whether they repatriate them or not.  By contrast, under a repatriation tax holiday, companies choose whether to repatriate their earnings, and the tax rate would be set extremely low to incentivize them to do so.

Also, a transition tax would be coupled with reforms to reduce or eliminate companies’ incentive to stockpile profits overseas — whereas another repatriation holiday would encourage firms to stockpile profits offshore, as noted above.

For these reasons, a well-designed transition tax — unlike a repatriation holiday — would reduce deficits, not raise them.

Working-Family Tax Credit Essentials, Part 5: The Impact in Your State

January 27, 2015 at 4:08 pm

Previous posts in this series on our new chart book have explained that the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC):

Our chart book also includes fact sheets with by-state data on how the EITC and CTC reduce poverty, who benefits, and how state EITCs can supplement the federal credit.  The fact sheets also give state-specific data on the impact of making the key EITC and CTC provisions permanent and of strengthening the EITC for childless adults.  Click on a state below for its fact sheet.

Working-Family Tax Credit Essentials, Part 4: Bipartisan Support for Helping Childless Workers

January 23, 2015 at 2:05 pm

Today’s post on our chart book on the pro-work Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) focuses on the most glaring hole in the EITC: it largely excludes childless adults and non-custodial parents.  President Obama and House Ways and Means Chairman Paul Ryan (R-WI) have advanced important proposals to address this problem, and, as Chairman Ryan said this week, his proposal “basically mirrors the president’s proposal.”  Senators Sherrod Brown (D-OH), Richard Durbin (D-IL), Patty Murray (D-WA), and Jack Reed (D-RI) and Reps. Danny Davis (D-IL), Richard Neal (D-MA), and Charles Rangel (D-NY) also have introduced key proposals.

The EITC misses many low-income childless workers entirely and provides only minimal help to many others.  All childless workers under age 25 are ineligible for the credit and the average credit for eligible workers between ages 25 and 64 is only about $270, or less than one-tenth the average $2,900 credit for filers with children.  A childless adult working full time at the minimum wage is ineligible.

As a result, childless adults are the only group that the federal tax code taxes into — or deeper into — poverty (see first chart).

Providing a more adequate EITC to low-income childless workers and lowering the eligibility age would raise these workers’ incomes and help offset their federal taxes.  Also, some leading experts believe that an expanded credit would begin to address some of the challenges that less-educated young people face, including low and falling labor-force participation rates, low marriage rates, and high incarceration rates.

The Obama and Ryan proposals would lower the age floor from 25 to 21 and expand the EITC for childless workers by doubling its phase-in rate, from 7.65 cents per added dollar of income to 15.3 cents (to fully offset workers’ payroll taxes on this income).  And they would raise the income levels at which the credit starts phasing out and phases out completely, as our paper explains.  These changes would make a big difference for childless workers (see second graph).

Obama’s Education Tax Proposals Would Help Middle-Class Families, Not Hurt Them as Opponents Inaccurately Claim

January 22, 2015 at 5:29 pm

Some critics claim that President Obama’s proposal to streamline and better target tax credits for higher education represents an attack on middle-class families, particularly because of the limits it would impose on so-called “529” accounts.  That’s backward:  the plan overall would do more to help both middle-class and lower-income families afford college.

The President’s plan would scale back tax benefits that disproportionately benefit high-income filers and redirect them toward low- and middle-income students — the people who most need help affording college.  By likely enabling more people to attend college, it would help them and the economy as a whole by contributing to a better-educated workforce.

Like many current tax breaks (such as those for retirement saving and mortgage interest), tax benefits for higher education give the biggest benefits to high- and upper-middle-income families since they’re in the highest tax brackets.  This means that the tax subsidies are less effective than they could be in boosting college enrollment because they largely go to people who likely would attend college anyway, while doing too little for many people from low- and middle-income families who simply can’t afford college without help.

Further, the tax subsidies are delivered through a maze of overlapping provisions, so many eligible families aren’t aware of them.

That’s why many education policy groups (see here, here, and here) have called for streamlining and better targeting education tax breaks.  Representatives Danny Davis (D-IL) and Diane Black (R-TN) introduced a bipartisan bill in 2013 based on these principles, and former House Ways and Means Committee Chairman Dave Camp’s tax reform plan included a similar proposal.

The President’s plan also uses this framework.  It would shrink some of the education tax subsidies most heavily focused on high-income families and use the savings to strengthen and make permanent the education tax incentive best targeted on low- and middle-income families:  the American Opportunity Tax Credit (AOTC).

The AOTC is partially refundable, which means families with incomes too low to owe federal income tax can receive a partial credit.  But under current law, the AOTC will expire at the end of 2017 and be replaced by a smaller, non-refundable education tax credit called the Hope Credit.  The President’s proposal would improve the AOTC for both low-income and middle-class families by making it permanent and raising the amount of the AOTC that is refundable.

At the same time, the President’s plan would limit a number of inefficient tax benefits that are heavily tilted toward upper-income families, including those for 529 plans.  Currently, filers don’t owe taxes on the earnings from 529 plans either as they accrue or when those earnings are withdrawn to pay for higher education.

Some 80 percent of the benefits of 529 plans go to households with incomes above $150,000, Survey of Consumer Finances data show; about 70 percent go to households with incomes above $200,000.  That’s because higher-income households can most afford to save substantial amounts for college, and because tax exemptions are worth the most to them, saving them up to 40 cents (for people in the top income tax bracket) per dollar earned in these plans that’s used for higher education expenses.  Since there are no income limits on using the plans, families with multi-million-dollar incomes can amass huge 529 accounts and benefit very handsomely from this tax break.

Under the President’s plan, earnings in 529 accounts would remain tax-free as they accrue, but filers would pay tax on the gains when they withdraw the funds, so filers would still benefit from deferring taxes on those gains. And the proposal would only apply to new deposits in 529 accounts; the billions of dollars already in those accounts would be entirely exempt.

The University of Michigan’s Professor Susan Dynarski, a top expert on education tax policy, has praised the President’s 529 proposal as “smart,” commenting that the current treatment of 529s is “Incredibly expensive, poorly targeted, [and] ineffective.”

Scaling back the 529 tax subsidy for high-income filers and redirecting the funds towards low- and middle-income filers who most need support to afford higher education is sound policy that would make higher education more affordable for more low- and middle-income families.

In fact, overall, the President’s proposal would increase the total amount of resources provided in higher education tax subsidies, benefiting middle- and low-income families, and pay for that increase by reducing inefficient tax subsidies that overwhelmingly benefit people at the top of the income scale.  Since aid for families who don’t have high incomes would increase, opponents’ claims that the plan would increase student debt levels are hard to fathom. The effect is likely to be just the opposite.