The Center's work on 'Other Issues' Issues


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.

Considering Tax Reform? Here’s a Must-Read

October 2, 2014 at 1:49 pm

With leading members of both parties placing tax reform high on the agenda for next year, a  new paper by William B. Gale, Co-Director of the Urban-Brookings Tax Policy Center (TPC), and Andrew Samwick, a Dartmouth College professor and former Chief Economist for President George W. Bush’s Council of Economic Advisers, is a must read.  They review the evidence about how income taxes affect economic growth and explain:

The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel.  However, theory, evidence, and simulation studies tell a different and more complicated story.

Gale and Samwick highlight some often-overlooked factors about how tax changes affect growth, including:

Tax changes affect the budget.  As Gale and Samwick note, research shows that large, unfinanced tax cuts can hurt growth because the increase in deficits creates a drag on national savings and investment that outweighs any positive incentive effects.  Conversely, in the face of increasing long-run deficits, revenue increases could boost growth.

Scaling back inefficient tax subsidies can promote growth.  Howard Gleckman, a TPC fellow and moderator of a discussion at the TPC event releasing Gale and Samwick’s paper in which I participated, noted that our panel:

[G]enerally agreed that the real benefit [of tax reform] likely comes from scaling back or even eliminating inefficient tax preferences, rather than reducing rates. Those changes make it more likely that people will allocate resources to maximize their economic benefit, rather than to maximize their tax savings.  If that shift is big enough, it could increase the overall size of the economy.

We could use the revenues generated by such base broadening to reduce long-run deficits, which would boost growth over the long run. (As we repeatedly emphasize, however, getting the economy back to full employment should be a greater priority than deficit reduction.)

IRS Commissioner Confirms House-Passed Cuts to IRS Budget Could Be “Catastrophic”

August 25, 2014 at 3:48 pm

IRS Commissioner John Koskinen said, according to Tax Notes, that the effects of House-passed IRS budget cuts would be “very serious if not catastrophic” to the agency’s ability to collect revenue and provide taxpayer services, adding: “I no longer want people to think that if we get less money it doesn’t make any difference.  It makes a big difference on taxpayers, on tax preparers, on tax compliance, on tax enforcement.”

As we have written, the House bill would cut IRS funding by $1.5 billion in 2015, including a $1.2 billion reduction in the agency’s enforcement budget, relative to 2014 funding.  The enforcement budget is crucial to the IRS’ ability to collect revenue and pursue tax cheats.  As Commissioner Koskinen affirms, reducing the IRS enforcement budget actually increases the deficit because it prevents the agency from thwarting tax fraud, evasion, and other illegal behavior, thus reducing federal revenue:

Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year.  The IRS annual budget is only $11 billion per year.

And the House cuts would come on top of years of IRS budget cuts that have already weakened enforcement and harmed taxpayer services.  Funding for the IRS fell by 14 percent (after accounting for inflation) between 2010 and 2014 (see chart).  These cuts forced the agency to reduce its workforce by over 10,000 employees and have led directly to a significant decline in the quality of taxpayer services.

For example, millions of taxpayers depend on IRS assistance over the telephone, yet in 2013, a typical caller to the IRS waited on hold for about 18 minutes for an IRS representative, and about 40 percent of calls were never answered.  This is a sharp decline from 2010, when the IRS answered three-quarters of calls and had an average wait time of just under 11 minutes.

Commissioner Koskinen was frank about the impact of continued cuts:

You cannot continue to reduce our resources and ask us to do more things.  The blind belief in Congress that they can continue to cut funding and we will just become more efficient is not the case.  We are becoming more efficient but there is a limit.  Eventually the effects will show up.  We are no longer going to pretend that cutting funding makes no difference.

Policymakers must give the IRS the resources it needs to fulfill its tax-collecting mission and provide the services taxpayers depend on.  The first step is for the Senate and the President to reject the reckless House cuts.

Kleinbard: “Competitiveness” Argument for Moving Firms’ Headquarters Overseas Is a Canard

August 12, 2014 at 10:10 am

The claim that many U.S. companies are moving their headquarters overseas because U.S. corporate tax rates make them uncompetitive is “largely fact-free,” USC law professor and former Joint Tax Committee staff director Edward Kleinbard concludes in a new paper.

While many firms and their lobbyists highlight the 35 percent top U.S. corporate rate, that’s not what companies actually pay, Kleinbard explains.  The effective tax rate that U.S. multinationals face on their worldwide income — that is, the share of this income that they pay in taxes — is well below this statutory rate.  A big reason is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax, even if they have few staff and do little business there.

Kleinbard also explains that the 2004 repatriation tax holiday, which allowed multinationals to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate, gave them a big incentive to stockpile billions more in tax havens and await another tax holiday.  These large stashes of profits in tax havens are an important reason — Kleinbard thinks the key reason — why many companies are considering moving their headquarters overseas.  By “inverting,” these companies can basically declare their own, permanent tax holiday and avoid ever paying U.S. taxes on foreign-held profits.  And once inverted, they can use legal avoidance schemes to effectively get those profits to their U.S. shareholders.

In other words, multinationals are already using tax havens to achieve zero or extremely low tax rates.  Firms considering inversions are searching not for a “competitive” tax rate but a zero tax rate by ensuring that those profits remain “stateless” — that is, taxed nowhere at all. (Echoing a famous line from Mae West, Kleinbard’s paper is titled “‘Competitiveness’ Has Nothing to Do With It.”)

Kleinbard’s solution has three parts:

  1. Make it harder for a U.S. multinational to invert.
  2. Prevent companies that do invert from effectively distributing their “foreign profits” to U.S. shareholders without paying U.S. tax.
  3. Make it harder for all U.S. multinationals to claim that U.S.-earned profits were actually earned in tax havens and low-tax countries.

House GOP Follows Ryan Anti-Poverty Plan With Pro-Poverty Legislation

July 25, 2014 at 11:12 am

House Budget Committee Chairman Paul Ryan (R-WI) extolled the anti-poverty effects of the Earned Income Tax Credit (EITC) and, in his new poverty proposal, wisely proposed expanding it for childless adults (including non-custodial parents).  The praise that Chairman Ryan correctly gave the EITC also applies to the refundable portion of the Child Tax Credit (CTC).  Both of these essential tax credits encourage work, expand opportunity, and reduce poverty.

Today, however, House Republicans are considering on the House floor permanent CTC legislation — a bill for which Rep. Ryan voted as a Ways and Means Committee member — that would lead to more poverty, not less.  The bill permanently alters the CTC by extending it higher up the income scale so that more families with six-figure incomes can benefit from it, while failing to make permanent a key CTC improvement from 2009 for working-poor and near-poor families that’s slated to expire at the end of 2017.  Census data show that letting the CTC improvement for low-income working families expire after 2017 would push 12 million people — including 6 million children — into or deeper into poverty (see chart).

As we have explained, the House bill raises the income levels at which the CTC begins to phase out and indexes those thresholds to inflation.  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $160,000, for example, would receive a new tax cut of $2,200 in 2018.  But because the bill fails to make permanent the 2009 reduction in the CTC’s earnings threshold after 2017, a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose her entire CTC of $1,725 in 2018.

The bill also indexes the current maximum credit of $1,000 per child to inflation, but that would not help most working families with low or moderate incomes because it benefits only those with incomes high enough to receive the maximum credit.  If the credit’s $3,000 earnings threshold (the level of family earnings at which the credit starts to phase in) is allowed to expire at the end of 2017, the threshold will nearly quintuple — and families making less than about $14,500 will lose their CTC altogether.  In addition, many working families with incomes somewhat above $14,500 will have their CTC cut substantially and no longer receive the maximum credit, making the inflation adjustment meaningless for them.  Under the House bill, indexing would not benefit a family with two children in 2018 until the family has earnings of at least $28,050 — nearly double full-time work at the minimum wage.

Chairman Ryan’s colleagues should consider the poverty-fighting effects of tax credits such as the CTC for low-income working families.  Then they should reverse course and put these families’ needs first, rather than last.