The Tax Foundation (TF) took issue with our post explaining that the new tax plan from Senators Mike Lee (R-CO) and Marco Rubio (R-FL) would give the highest-income people a large windfall while leaving many low-income working families behind. TF argues that the plan “actually produces the largest increase in after-tax income for the lowest income earners, not the highest.” Count me as a skeptic. Let’s take a closer look at the plan’s effects at the bottom and top of the income scale.
First, the bottom. TF claims the bottom 10 percent of households would see a 44 percent increase in after-tax income under Lee-Rubio (before counting TF’s large and unrealistic estimate of the plan’s impact on economic growth). But a look at the main provisions potentially affecting low-income families doesn’t support this.
- Lee-Rubio creates a new $2,500 Child Tax Credit to complement the current child credit. TF says the new credit “cuts taxes for most taxpayers.” But it would exclude many working-poor families. The new credit is refundable only up to the sum of total income and payroll taxes after applying all other credits, such as the Earned Income Tax Credit (EITC) and existing Child Tax Credit. After these credits, most low-income working families will have no net federal income and payroll tax liability and consequently won’t qualify for the new CTC. In other words, its design excludes most low-income working families.
- Lee-Rubio also replaces the standard deduction and personal exemption with a new tax credit (and eliminates the head of household filing status). TF states that this credit would be “fully refundable,” though the Lee-Rubio document itself doesn’t say one way or the other. Let’s assume it is; if so, the new credit would benefit many low-income families. Yet a substantial number of other low-income families would lose from this change, because the new credit would replace other current provisions that are worth more for them. To return to the example family we used in our previous post, a mother with two children working full time at the minimum wage would lose $25 in 2018 from this change. Some low-income workers would lose substantially more than this amount, while other low-income workers could get a significant boost from this change, assuming the credit is indeed fully refundable.
- More importantly, Lee-Rubio would let a key provision of the current Child Tax Credit expire after 2017, causing millions of low-income working families to lose all or part of their credit. The provision in question — under which the Child Tax Credit begins to phase in as family earnings rise above $3,000, rather than being unavailable until family earnings reach nearly $15,000 — is currently in effect through 2017; it needs to be made permanent. Ron Haskins, who as a senior Republican congressional staffer was a lead architect of the 1996 welfare law and later served as an adviser to President George W. Bush before joining the Brookings Institution, urged in recent congressional testimony that this provision be made permanent. Haskins called it “an important part of the work-based safety net” and noted that if it’s allowed to expire after 2017, “working families with children will lose billions of dollars and a substantial amount of work incentive.” He observed that this “is one policy that both encourages work and attacks inequality directly by boosting the income of low-income workers.” Yet Lee-Rubio lets the provision end after 2017.
If the provision expires, the full-time minimum-wage mother with two children whom we discussed above would lose her existing $1,725 CTC in 2018. Many other low-income workers would lose under the plan as well. Failing to extend the improvements in the CTC and EITC scheduled to expire at the end of 2017 would cast millions of people into or deeper into poverty.
Now let’s turn to the top end of the income scale.
Lee-Rubio cuts the top income tax rate to 35 percent and eliminates the alternative minimum tax, both of which represent large tax cuts that would heavily benefit high-income households. Lee-Rubio also includes some tax increases on high-income filers by cutting back many deductions. But both of these sets of changes were part of a tax plan that Senator Lee introduced in 2014 and the Tax Policy Center (TPC) analyzed. TPC found that while the curtailment of deductions would, by itself, increase high-income households’ tax burdens, the net effect of the proposal overall would be a large tax cut for those at the top of the income scale.
Moreover, Lee-Rubio appears to tilt even more heavily to the top than last year’s Lee plan. It does so by: 1) eliminating taxes on capital gains and dividends, which are highly concentrated at the top; 2) eliminating the estate tax; and 3) cutting corporate and business taxes.
By eliminating taxes on capital gains and dividends, the plan would make the single largest source of income for the wealthiest people in the country tax free. By eliminating the estate tax, which now applies only to the estates of the wealthiest 0.15 percent of people who die, the plan would allow vast sums that the wealthiest Americans have amassed to be passed on to their heirs and heiresses tax free as well.
The plan also would cut the tax rate on domestic corporate profits to 25 percent, cut taxes on the partnership income of very high-income households from 39.6 percent to 25 percent, and cut corporate taxes on profits that U.S. companies earn overseas to zero. The plan does cut back various corporate tax breaks. But overall, it is likely to reduce corporate and business taxes significantly. And since ownership of businesses and corporate stock is highly concentrated among high-income individuals, this would add to the tax cuts they receive.
As Howard Gleckman of the Tax Policy Center noted a few days ago, last year’s Lee plan would add $2.4 trillion to the debt over ten years and give almost one-third of its costly tax cuts to the top 1 percent of households. Gleckman added that the new Lee-Rubio version of the plan “would surely be even more expensive.”
The bottom line is that those at the top would be the big winners even as many low-income working families lost ground.