Using Refundable Tax Credits to Help Low-

income TaxpayersTax Expenditures and Public Policy in

Comparative Perspective Osgoode Hall Law School

Toronto, Canada

by Jon FormanAlfred P. Murrah Professor of Law

University of Oklahoma

Income Inequality

 Gini

coefficientInterdecile ratio

P90/P10Interdecile ratio

P50/P10Level Rank Level Rank Level Rank

Australia 0.30 16 3.95 15 2.09 18Canada 0.32 18 4.12 17 2.14 20Mexico 0.47 30 8.53 30 2.86 30Sweden 0.23 2 2.79 2 1.72 1United Kingdom 0.34 23 4.21 18 1.99 15United States 0.38 27 5.91 27 2.69 29OECD-30 0.31 .. 4.16 2.09 ..

2http://dx.doi.org/10.1787/420888675468

Income Inequality, cont.Interquintile share ratio

(S80/S20)Interdecile ratio

(P90/P10)Australia 4.8 4.0Canada 5.2 4.1Mexico 12.1 8.5Sweden 3.3 2.8United Kingdom 5.4 4.2United States 7.9 5.9OECD-30 5.3 4.1

3http://dx.doi.org/10.1787/421061637532

Inequality and Redistribution

CountryGini

Before Gini

After

Poverty Before

(50% of median

income)

Poverty After

(50% of median

income)

Tax %GD

P

Social Spending

%GDP

Australia 0.46 0.3 28.6 12.4 30.6 17.1

Canada 0.44 0.32 23.1 12.0 33.3 16.5

Mexico n/a 0.47 21.0 18.4 20.6 7.0

Sweden 0.43 0.23 26.7 5.3 49.1 29.4

United Kingdom 0.46 0.34 26.3 8.3 37.1 21.3

United States 0.46 0.38 26.3 17.1 28.0 15.9

OECD 0.45 0.31 26.4 10.6 35.9 20.5

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Inequality & Child Poverty in Selected Countries

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Social Spending & Child Poverty in Selected Countries

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

7http://dx.doi.org/10.1787/422058728151

Tax-to-GDP Ratios, 2006

CountryIncome Taxes

Payroll taxes

Consumption Taxes

Total Taxes

Australia 18.1 - 8.3 30.6

Canada 16.2 4.9 8.1 33.3

United Kingdom 14.7 6.9 10.8 37.1

United States 13.5 6.7 4.7 28.0

OECD Total 13.0 9.1 11.1 35.9

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U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2009

Unmarried individuals

Heads of household with one

child

Married couples filing joint returns

with two children

Standard deduction

$5,700 $ 8,350 $11,400

Personal exemptions

$3,650 $ 7,300 $14,600

Simple income tax threshold

$9,350 $15,650 $26,000

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Tax Rate Schedules for Various Taxpayers, 2009

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Tax rate Rate bracket

Unmarried individualsHeads of household

with one child

Married couples filing joint returns with two

children10 $0 to $8,350 $0 to $11,950 $0 to $16,70015 $8,350 to $33,950 $11,950 to $45,500 $16,700 to $67,90025 $33,950 to $82,250 $45,500 to $117,450 $67,900 to $137,05028 $82,250 to $171,550 $117,450 to $190,200 $137,050 to $208,85033 $171,550 to $372,950 $190,200 to $372,950 $208,850 to $372,95035 Over $372,950 Over $372,950 Over $372,950

“Making Work Pay” Credit

New refundable credit I.R.C. § 36A (ARRA §1001) Will cut taxes for working families Up to $400 ($800 if MFJ)

Computed as 6.2 percent of earned income up to $400 ($800 if MFJ)

Phase out for taxpayers with modified AGI > $75,000 ($150,000 MFJ)

Claim credit on 2009 tax return Tax withholding decrease

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Earned Income Tax Credit (EITC) Increase

New credit percentage for 3 or more qualifying children I.R.C. § 32 (ARRA § 2002) Temporary increase 2009 & 2010 Computed as 45% of earnings (up from

40%) Maximum credit increase = $5,028 to

$5,657 Maximum AGI increase = $43,415 to

$48,279

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Child Tax Credit

$1,000 per qualifying child I.R.C. § 24 (ARRA § 1003)

Temporary expansion of eligibility for refundable credit

More lower income families qualify: 2008 – threshold amount was = $8,500 2009 – threshold amount = $3,000 2010 – threshold amount = $3,000

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Poverty Levels & Net Federal Tax Thresholds, 2009

Unmarried individual

Single parent with 1 child

Married couple with 2

children

Married couple with 3

children1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Simple income tax threshold (before credits)

$9,350 $15,650 $26,000 $29,650

3. Income tax threshold after credits

$13,391 $32,317 $50,233 $60,550

4. Employee payroll tax threshold

$0 $0 $0 $0

5. Combined income and payroll tax threshold

$9,336 $25,667 $38,592 $43,743

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Taxes at Poverty Level, 2009

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Unmarried individual

Single parent with 1 child

Married couple with 2

children

Married couple with 3

children1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Income tax at poverty level (after credits)

-$452 -$4,443 -$7,695 -$8,537

3. Employee Social Security & Medicare tax at poverty level

$829 $1,115 $1,687 $1,973

4. Combined income and payroll tax at poverty level

$377 -$3,328 -$6,008 -$6,564

5. Combined tax as a percent of income at poverty level

3.5% -22.8% -27.2% -25.5%

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Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars)

2008 actual 2014 estimateSocial Security $612 $838Medicare 385 630Medicaid 201 326Unemployment compensation 43 48Supplemental Security Income 38 49Earned income tax credit 41 43Child tax credit 34 24Making work pay tax credit n/a 20Food assistance 54 79Family support 25 24Housing assistance <1 8Retirement and disability programs for civilians, military and veterans

155 21717

U.S.: Share of Household Income & Gini Index, 2005

Market income Disposable income

Quintiles

Lowest 1.50 4.42

Second 7.26 9.86

Middle 14.00 15.33

Fourth 23.41 23.11

Highest 53.83 47.28

Gini Index 0.493 0.418

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Canada

Canada Child Tax Benefit (CCTB) C$111.66 for each child under age 18

National Child Benefit Supp. (NCBS) Up to C$173.00 per month

Child Disability Benefit (CDB) Up to C$204.58 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$248 for taxpayer, spouse or partner C$130 for each child

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United Kingdom

Child Benefit £20/week oldest child; £13.20 others

Child Tax Credit £545 per year/family+ £2,235/child

Working Tax Credit £1,890 per year per worker + 80% × child care, up to £175/week for

1 child; £300/week for 2+ children

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Australia

Family Tax Benefit Part A: up to A$4,803.40 child under 13;

A$6033.45 child 13-15; etc. Part B: extra help for low-income single

parents & families with one main income

Child Care Tax Rebate Baby Bonus

$5,185, paid in 13 fortnightly installments

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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)

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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About the Author Jonathan Barry Forman (“Jon”) is

the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law, teaching tax and pension law;

the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year; and

the author of Making America Work (Washington, DC: Urban Institute Press, 2006).

Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan and master’s degrees in both economics and psychology.

Jon can be reached at jforman@ou.edu, 405-325-4779 These slides at www.law.ou.edu/faculty/forman.shtml

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