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

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

Rising Inequality 4

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

7 Distribution of Earnings, 2004

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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

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, Rev. Proc , IRB 297,

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 $8,500$0 to $12,150$0 to $17,000 15$8,500 to $34,500$12,150 to $46,250$17,000 to $69,000 25$34,500 to $83,600$46,250 to $119,400$69,000 to $139,350 28$83,600 to $174,400$119,400 to $193,350$139,350 to $212,300 33$174,400 to $379,150$193,350 to $379,150$212,300 to $379,150 35Over $379,150 Rev. Proc , IRB 297,

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

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

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

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

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 Rev. Proc , IRB 297,

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

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 20

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

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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

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

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 30

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

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 future-summary.pdf

Securing a Clean Energy Future 33 future-summary.pdf

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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) 40 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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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 , 42