Using Refundable Tax Credits to Help Low- income...
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Using Refundable Tax Credits to Help Low- income Taxpayers by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma & ATAX Fellow, UNSW University of Melbourne Melbourne, Australia August 16, 2011
Transcript of Using Refundable Tax Credits to Help Low- income...
Using Refundable Tax Credits to Help Low-income Taxpayers
by Jon FormanAlfred P. Murrah Professor of Law
University of OklahomaNorman, Oklahoma
& ATAX Fellow, UNSW
University of MelbourneMelbourne, Australia
August 16, 2011
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Figure 1. Share of Household Income
0
10
20
30
40
50
60
Poorest 20% Middle 20% Richest 20%
Per
cent
Free market After taxes & transfers
U.S.: Share of Household Income & Gini Index, 2005
Market income Disposable incomeQuintilesLowest 1.50 4.42Second 7.26 9.86Middle 14.00 15.33Fourth 23.41 23.11Highest 53.83 47.28Gini Index 0.493 0.418
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Rising Inequality
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10.6 9.8 10.211.3 11.9
13.2 13.8 14.8 14.816.2
14.5 14.717.0
19.1
22.724.6
26.1 25.5
0
5
10
15
20
25
30
1970 1975 1980 1985 1990 1995 2000 2005 2009
Rat
io
Year
Figure 3. Ratio of Average Household Income of the Top 5 and 20 Percent of Households to the Average Household Income of the Bottom 20 Percent of Households, 1970-2009
Top 20%/bottom 20%Top 5%/bottom 20%
Source: U.S. Census Bureau, table IE-3, http://www.census.gov/hhes/www/income/data/historical/inequality/index.html.
Inequality and Redistribution
CountryGini
Before Gini
After
Poverty Before
(50% of median
income)
Poverty After
(50% of median
income)
Tax %
GDP
Social Spending
%GDP Australia 0.46 0.3 28.6 12.4 30.6 17.1Canada 0.44 0.32 23.1 12.0 33.3 16.5
Mexico n/a 0.47 21.0 18.4 20.6 7.0Sweden 0.43 0.23 26.7 5.3 49.1 29.4United Kingdom 0.46 0.34 26.3 8.3 37.1 21.3United States 0.46 0.38 26.3 17.1 28.0 15.9OECD 0.45 0.31 26.4 10.6 35.9 20.5
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U.S. Average Annual Earnings of Full-time Workers, 2008
Doctors (Family & GP) $161,490Lawyers 124,750Economists 90,830Nurses (RN) 65,130Police 52,810Auto mechanics 38,967Secretaries 29,990Garbage collectors 37,540Orderlies 24,620Waiters and waitresses 19,580
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Distribution of Earnings, 2004
$15,600 $26,000 $36,000$50,000
$84,000
$0
$100,000
$200,000
$300,000
$400,000
0 10 20 30 40 50 60 70 80 90 100
Percentile
Ear
ning
s
8
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Figure 8. The Size Distribution of Wealth, 2004: Percentage Share of Wealth Held by...
34.324.6
12.3 13.4
84.7
11.33.8 0.2
01020
3040506070
8090
100
Top 1% Next 4% Next 5% Next10%
Top20%
2nd20%
3rd 20% Bottom40%
Perc
ent
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Figure 10. Share of Household Income
0
10
20
30
40
50
60
Poorest20%
Middle 20% Richest20%
Per
cent
Egalitarian Free market After taxes & transfers Just?
Redistribution through Cash Transfers & Taxes
Transfers to lowest quintile
Taxes from lowest quintile
Net transfers to lowest quintile
Australia 5.9 0.2 5.8Canada 3.5 0.6 2.9Korea 0.9 0.5 0.4Sweden 8.5 2.8 5.7United Kingdom 4.6 0.4 4.1United States 2.3 0.4 1.9OECD-23 5.4 1.2 4.2
11http://dx.doi.org/10.1787/422058728151
U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2011
Unmarried individuals
Heads of household with one
child
Married couples filing joint returns
with two children
Standard deduction $5,800 $ 8,500 $11,600
Personal exemptions $3,700 $ 7,400 $14,800
Simple income tax threshold
$9,500 $15,900 $26,400
12Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.
Tax Rate Schedules for Various Taxpayers, 2011
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Tax rate Rate bracket
Unmarried individuals
Heads of household with one child
Married couples filing joint returns with two
children10 $0 to $8,500 $0 to $12,150 $0 to $17,00015 $8,500 to $34,500 $12,150 to $46,250 $17,000 to $69,00025 $34,500 to $83,600 $46,250 to $119,400 $69,000 to $139,35028 $83,600 to $174,400 $119,400 to $193,350 $139,350 to $212,30033 $174,400 to $379,150 $193,350 to $379,150 $212,300 to $379,15035 Over $379,150 Over $379,150 Over $379,150
Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.
14Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.
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Center on Budget and Policy Priorities, Top Ten Tax Charts (April 14, 2011), http://www.offthechartsblog.org/top-ten-tax-charts/.
1620 Facts About U.S. Inequality that Everyone Should Know, http://stanford.edu/group/scspi/cgi-bin/facts.php.
Productivity and Real Income
Rising Poverty
17U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), http://www.census.gov.
Earned Income Tax Credit (EITC) Increase Relatively new credit percentage for 3
or more qualifying children I.R.C. § 32 Temporary increase 2009-2010,
extended 2011-2012 45% of earnings (up from 40%)
Maximum credit increased to $5,751 in 2011
Maximum AGI increased to $49,078 in 2011
18Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.
Child Tax Credit $1,000 per qualifying child I.R.C. § 24
Temporary expansion of eligibility for refundable credit (15% × earned income minus $3,000 threshold)
More lower income families qualify: 2008 – threshold amount was = $8,500 2009-2012 – threshold amount = $3,000
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Poverty Levels & Net Federal Tax Thresholds, 2010
Unmarried individual
Single parent w/ 1
child
Married couple w/ 2 children
Married couple w/ 3 children
1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Simple income tax threshold (before credits)
$9,350 $15,700 $26,000 $29,650
3. Income tax threshold after credits
$13,395 $32,380 $50,250 $60,567
4. Employee payroll tax threshold
$0 $0 $0 $0
5. Combined income & payroll tax threshold
$9,348 $25,717 $38,635 $43,788
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Taxes at Poverty Level, 2010
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Unmarried individual
Single parent w/
1 child
Married couple w/ 2 children
Married couple w/ 3 children
1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Income tax at poverty level (after credits)
-$453 -$4,450 -$7,712 -$8,554
3. Employee Social Security & Medicare tax at poverty level
$829 $1,115 $1,687 $1,973
4. Combined income & payroll tax at poverty level
$376 -$3,335 -$6,025 -$6,581
5. Combined tax as a % of income at poverty level
3.5% -22.9% -27.3% -25.5%
22-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
Tax
Liab
ility
Income
Net Federal Tax Liabilities for Selected Households, 2010
Unmarried Individual
Head of Household, 1 Child
Married Couple, 2 Children
Married Couple, 3 Children
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Figure 14. Income Tax Rates, Single Parent with Two Children and Earned Income Only, 2006
0%
10%
20%
30%
40%
50%
60%
$0 $50,000 $100,000 $150,000 $200,000Earned income
Tax
rate
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Figure 15. Social Security Tax Rates on Earned Income, 2006
0%
10%
20%
30%
40%
50%
60%
$0 $50,000 $100,000 $150,000 $200,000Earned income
Tax
rate
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Figure 17. Actual Tax Rate on Single Parents with Earned Income Only, 2006
-40%
-20%
0%
20%
40%
60%
$0 $50,000 $100,000 $150,000 $200,000
Earned income
Eff
ectiv
e ta
x ra
te
Effective tax rate Linear trend line
Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars)
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2009 actual 2015 estimateSocial Security $678 $893Medicare 425 651Medicaid 251 336Unemployment compensation 119 65Supplemental Security Income 41 52Earned income tax credit 42 45Child tax credit 24 26Making work pay tax credit <1 n/aFood assistance 72 89Family support 26 25Housing assistance 10 5General retirement and disability 8 10Federal employee retirement and disability 118 141Veterans benefits and services 49 84
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Average Cumulative Tax Rates Confronting Low-to-Moderate-Income Families ($10k - $40k)
35.9%58.8%
88.6%
0%20%40%60%80%
100%
Tax Plus Food Stamps &Health
Plus TANF, Housing,Child Care
Perc
ent
Source: Adam Carasso & C. Eugene Steuerle, The True Tax Rates Confronting Families with Children, Tax Notes 253 (October 10, 2005).
Canada 2010 Canada Child Tax Benefit (CCTB) C$112.33 for each child under age 18
National Child Benefit Supp. (NCBS) Up to C$174.00 per month
Child Disability Benefit (CDB) Up to C$205.83 per month
Universal Child Care Benefit (UCCB) C$1,200 per year for children under 6
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Canada, cont. Working Income Tax Benefit (WITB) refundable tax credit of 25% of earned
income in excess of C$3,000 maximum of C$925 for individuals
(C$1,680 for single parents and couples) Refundable Goods and Services Tax
Credit C$250 for taxpayer, spouse or partner C$131 for each child
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United Kingdom 2010 Child Benefit £20.30/week oldest child; £13.40 others
Child Tax Credit £545 per year/family+ £2,300/child
Working Tax Credit £1,920 per year per worker + 80% × child care, up to £140/week for
1 child; £240/week for 2+ children
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Australia 2010 Family Tax Benefit Part A: up to A$4,905.60 child under 13;
A$6,161.20 child 13-15; etc. Part B: extra help for low-income single
parents & families with one main income Baby Bonus $5,294, paid in 13 fortnightly
installments Child Care Tax Rebate 50 percent of out-of-pocket child care 31
Australia 2011: Add a Carbon Tax, but:
Triple the tax-free threshold to $18,200 Which will replace all but $445 of the
low-income tax offset (LITO) Improve work incentives @ low incomes Remove one million taxpayers
Increase Government payments Pensions, allowances and Family Tax
Benefit32http://www.cleanenergyfuture.gov.au/wp-content/uploads/2011/07/securing-a-clean-energy-
future-summary.pdf
Securing a Clean Energy Future
33http://www.cleanenergyfuture.gov.au/wp-content/uploads/2011/07/securing-a-clean-energy-future-summary.pdf
34http://www.futuretax.gov.au/content/TaxForum/discussion_paper/tax_forum_next_steps_for_Australia_20110729.pdf
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Figure 12. How a 30 Percent Payroll Tax Can Reduce Work Effort
$0
$5,000
$10,000
$15,000
$20,000
$25,000
05001,0001,5002,0002,500
Hours of work
Inco
me
afte
r ta
x
Income $10/hour
Income after tax
Utility curve 1
Utility curve 2
After: 1,750 hours, $12,500/year
Before: 2,000 hours, $20,000/year
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Figure 21. How a Simple 50 Percent Earnings Subsidy Can Increase Work Effort
$0
$2,500
$5,000
$7,500
$10,000
$12,500
$15,000
$17,500
$20,000
05001,0001,5002,0002,500
Hours of work
Post
-tra
nsfe
r In
com
e
Income $5/hour
Income after transfer
Utility curve 1
Utility curve 2
After: 1,750 hours, $13,125/year
Before: 1,500 hours,$7,500/year
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How an Integrated Tax & Transfer System Would Affect a Single Parent with 2 Children($2,000 Personal Tax Credits, $2,000 per Worker Credits, and 20 & 35% Tax Rates)
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Pre-transfer earnings
Plus personal tax
credits
Plus worker credit
Less tax imposed
After-tax income
0 $6,000 0 0 $6,000$10,000 $6,000 $2,000 $2,000 $16,000$20,000 $6,000 $2,000 $4,000 $24,000$50,000 $6,000 $2,000 $10,000 $48,000
$100,000 $6,000 $2,000 $27,500 $80,500$200,000 $6,000 $2,000 $62,500 $145,500
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How an Integrated Tax and Transfer System Would Affect a Single Parent with Two Children ($2,000 Universal Grants, $2,000 per Worker Credits, and 20 and 35 Percent Tax Rates)
$0
$25,000
$50,000
$75,000
$100,000
$0 $25,000 $50,000 $75,000 $100,000
Pre-transfer earnings
Post
-tax,
pos
t-tra
nsfe
r in
com
e
Pre-transfer earnings
Post-tax, post transferincome
About the Author Jonathan Barry Forman (“Jon”) is the Alfred P.
Murrah Professor of Law at the University of Oklahoma College of Law and the author of Making America Work(Washington, DC: Urban Institute Press, 2006).
Jon was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year.
Jon can be reached at [email protected], +1-405-325-4779, www.law.ou.edu/faculty/forman.shtml.
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