Using Refundable Tax Credits to Help Low- income Taxpayers by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma Tax Policy Colloquium Loyola Law School Los Angeles, California August 30, 2010

Income Inequality Gini coefficient Interdecile ratio P90/P10 Interdecile ratio P50/P10 LevelRankLevelRankLevelRank Australia Canada Mexico Sweden United Kingdom United States OECD

Income Inequality, cont. Interquintile share ratio (S80/S20) Interdecile ratio (P90/P10) Australia Canada Mexico Sweden United Kingdom United States OECD

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

5 Inequality & Child Poverty in Selected Countries

6 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 Canada Korea Sweden United Kingdom United States OECD

Tax-to-GDP Ratios, 2007 Country Income Taxes Payroll taxes Consumption Taxes Total Taxes Australia Canada United Kingdom United States OECD Total Source: Organisation for Economic Co-Operation and Development, Tax revenue statistics, tables O.1, O.2, O.3, and O.5,

U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2010 Unmarried individuals Heads of household with one child Married couples filing joint returns with two children Standard deduction$5,700$ 8,400$11,400 Personal exemptions$3,650$ 7,300$14,600 Simple income tax threshold $9,350$15,700$26,000 9

Tax Rate Schedules for Various Taxpayers, Tax rate Rate bracket Unmarried individuals Heads of household with one child Married couples filing joint returns with two children 10$0 to $8,375$0 to $11,950$0 to $16,750 15$8,375 to $34,000$11,950 to $45,550$16,750 to $68,000 25$34,000 to $82,400$45,550 to $117,650$68,000 to $137,300 28$82,400 to $171,850$117,650 to $190,550$137,300 to $209,250 33$171,850 to $373,650$190,550 to $33,650$209,250 to $373,650 35Over $373,650

“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 2010 tax return Tax withholding decrease 11

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 increased to $5,666 in 2010 Maximum AGI increased to $48,362 in

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 and 2010 – threshold amount = $3,000 13

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 threshold (before credits) $9,350$15,700$26,000$29, Income tax threshold after credits $13,395$32,380$50,250$60, Employee payroll tax threshold $0 5. Combined income & payroll tax threshold $9,348$25,717$38,635$43,788 14

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

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Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) actual2015 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 49 84

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

Canada 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 19

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 20

United Kingdom 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 21

Australia 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 22

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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) 24 Pre-transfer earnings Plus personal tax credits Plus worker credit Less tax imposed After-tax income 0 $6, $10,000 $6,000$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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$2,000 per Worker Earned Income Credit, with or without a Phase-out (Credit = 20% ×1 st $10,000 of earnings)

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 author of Making America Work (Washington, DC: Urban Institute Press, 2006); and –was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the academic year. 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 & Slides, etc. at 27