Using Refundable Tax Credits to Help Lowincome

Transcription

1 Using Refundable Tax Credits to Help Lowincome 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

2 Figure 1. Share of Household Income Percent Poorest 20% Middle 20% Richest 20% Free market After taxes & transfers 2

3 U.S.: Share of Household Income & Gini Index, 2005 Market income Disposable income Quintiles Lowest Second Middle Fourth Highest Gini Index

4 Rising Inequality 30 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, Top 20%/bottom 20% Top 5%/bottom 20% Ratio Year Source: U.S. Census Bureau, table IE-3, 4

5 Inequality and Redistribution Country Gini Before Gini After Poverty Before (50% of median income) Poverty After (50% of median income) Tax % GDP Social Spending %GDP Australia Canada Mexico n/a Sweden United Kingdom United States OECD

6 U.S. Average Annual Earnings of Full-time Workers, 2008 Doctors (Family & GP) $161,490 Lawyers 124,750 Economists 90,830 Nurses (RN) 65,130 Police 52,810 Auto mechanics 38,967 Secretaries 29,990 Garbage collectors 37,540 Orderlies 24,620 Waiters and waitresses 19,580 6

7 Distribution of Earnings, 2004 $400,000 $300,000 Earnings $200,000 $100,000 $15,600 $26,000 $36,000 $50,000 $84,000 $ Percentile 7

8 8

9 Figure 8. The Size Distribution of Wealth, 2004: Percentage Share of Wealth Held by Percent Top 1% Next 4% Next 5% Next 10% Top 20% nd 20% rd 20% Bottom 40% 9

10 60 Figure 10. Share of Household Income Percent Poorest 20% Middle 20% Richest 20% Egalitarian Free market After taxes & transfers Just? 10

11 Redistribution through Cash Transfers & Taxes Transfers to lowest quintile Taxes from lowest quintile Net transfers to lowest quintile Australia Canada Korea Sweden United Kingdom United States OECD

12 U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2011 Married Unmarried individuals Heads of household with one child 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 Rev. Proc , IRB 297, 12

13 Tax Rate Schedules for Various Taxpayers, 2011 Tax rate Rate bracket Unmarried individuals Heads of household with one child Married couples filing joint returns with two children 10 $0 to $8,500 $0 to $12,150 $0 to $17, $8,500 to $34,500 $12,150 to $46,250 $17,000 to $69, $34,500 to $83,600 $46,250 to $119,400 $69,000 to $139, $83,600 to $174,400 $119,400 to $193,350 $139,350 to $212, $174,400 to $379,150 $193,350 to $379,150 $212,300 to $379, Over $379,150 Over $379,150 Over $379,150 Rev. Proc , IRB 297, 13

14 Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, 14

15 Center on Budget and Policy Priorities, Top Ten Tax Charts (April 14, 2011), /top-ten-tax-charts/. 15

16 Productivity and Real Income 20 Facts About U.S. Inequality that Everyone Should Know, 16

17 Rising Poverty U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), 17

18 Earned Income Tax Credit (EITC) Increase Relatively new credit percentage for 3 or more qualifying children I.R.C. 32 Temporary increase , extended % of earnings (up from 40%) Maximum credit increased to $5,751 in 2011 Maximum AGI increased to $49,078 in 2011 Rev. Proc , IRB 297, 18

19 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, threshold amount = $3,000 19

20 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, Simple income tax $9,350 $15,700 $26,000 $29,650 threshold (before credits) 3. Income tax $13,395 $32,380 $50,250 $60,567 threshold after credits 4. Employee payroll $0 $0 $0 $0 tax threshold 5. Combined income & payroll tax threshold $9,348 $25,717 $38,635 $43,788 20

21 Taxes at Poverty Level, 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, Income tax at -$453 -$4,450 -$7,712 -$8,554 poverty level (after credits) 3. Employee Social $829 $1,115 $1,687 $1,973 Security & Medicare tax at poverty level 4. Combined income & $376 -$3,335 -$6,025 -$6,581 payroll tax at poverty level 5. Combined tax as a % of income at poverty level 3.5% -22.9% -27.3% -25.5% 21

22 $15,000 Net Federal Tax Liabilities for Selected Households, 2010 Unmarried Individual $10,000 Head of Household, 1 Child Tax Liability $5,000 $0 Married Couple, 2 Children Married Couple, 3 Children -$5,000 -$10,000 Income 22

23 Figure 14. Income Tax Rates, Single Parent with Two Children and Earned Income Only, % 50% 40% Tax rate 30% 20% 10% 0% $0 $50,000 $100,000 $150,000 $200,000 Earned income 23

24 Figure 15. Social Security Tax Rates on Earned Income, % 50% 40% Tax rate 30% 20% 10% 0% $0 $50,000 $100,000 $150,000 $200,000 Earned income 24

25 60% Figure 17. Actual Tax Rate on Single Parents with Earned Income Only, % Effective tax rate 20% 0% -20% $0 $50,000 $100,000 $150,000 $200,000 Earned income -40% Effective tax rate Linear trend line 25

26 Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) 2009 actual 2015 estimate Social Security $678 $893 Medicare Medicaid Unemployment compensation Supplemental Security Income Earned income tax credit Child tax credit Making work pay tax credit <1 n/a Food assistance Family support Housing assistance 10 5 General retirement and disability 8 10 Federal employee retirement and disability Veterans benefits and services

27 Average Cumulative Tax Rates Confronting Low-to- Moderate-Income Families ($10k - $40k) Percent 100% 80% 60% 40% 20% 0% 35.9% Tax 58.8% Plus Food Stamps & Health 88.6% Plus TANF, Housing, Child Care Source: Adam Carasso & C. Eugene Steuerle, The True Tax Rates Confronting Families with Children, Tax Notes 253 (October 10, 2005). 27

28 Canada 2010 Canada Child Tax Benefit (CCTB) C$ for each child under age 18 National Child Benefit Supp. (NCBS) Up to C$ per month Child Disability Benefit (CDB) Up to C$ per month Universal Child Care Benefit (UCCB) C$1,200 per year for children under 6 28

29 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 29

30 United Kingdom 2010 Child Benefit 20.30/week oldest child; 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 30

31 Australia 2010 Family Tax Benefit Part A: up to A$4, child under 13; A$6, 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

32 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 low incomes Remove one million taxpayers Increase Government payments Pensions, allowances and Family Tax Benefit 32

33 Securing a Clean Energy Future 33

34 alia_ pdf 34

35 35

36 36

37 $25,000 Figure 12. How a 30 Percent Payroll Tax Can Reduce Work Effort Before: 2,000 hours, $20,000/year $20,000 After: 1,750 hours, $12,500/year Income after tax $15,000 $10,000 Income $10/hour Income after tax Utility curve 1 $5,000 Utility curve 2 $0 2,500 2,000 1,500 1, Hours of work 37

38 $20,000 Figure 21. How a Simple 50 Percent Earnings Subsidy Can Increase Work Effort $17,500 After: 1,750 hours, $13,125/year $15,000 Post-transfer Income $12,500 $10,000 $7,500 $5,000 Before: 1,500 hours, $7,500/year Income $5/hour Income after transfer Utility curve 1 Utility curve 2 $2,500 $0 2,500 2,000 1,500 1, Hours of work 38

39 39

40 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, $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 40

41 $100,000 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) Post-tax, post-transfer income $75,000 $50,000 $25,000 $0 $0 $25,000 $50,000 $75,000 $100,000 Pre-transfer earnings Pre-transfer earnings Post-tax, post transfer income 41

42 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 academic year. Jon can be reached at jforman@ou.edu, , 42