NEW PROPOSALS TO HELP LOW-INCOME TAXPAYERS

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A new book issued by the nonpartisan Washington-based Tax Foundation puts forward several tax proposals that would help low-income taxpayers with little impact on overall economic growth.

The foundation’s Alex Durante looks at the most extensive of the proposals in their new book, Options for Reforming America’s Tax Code 2.0: restructuring the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) based on the Family Security Act.

The CTC reduces a taxpayer’s tax liability based on the number of qualifying children under age 17 in their household. The credit is partially refundable up to $1,400 and phases out at $50 for every $1,000 in income above $200,000 for single filers and $400,000 for joint filers. After 2025, the credit is set to drop from $2,000 to $1,000, due to the expiration of the 2017 Tax Cuts and Jobs Act. The option here would retain the phaseout but make the credit fully refundable and more than double its value. The total credit would increase to $4,200 per child under age 6, and $3,000 per child from ages 6 to 17. It would also eliminate the minimum income requirement, currently set at $2,500 ($3,500 after 2025) for earned income.

The EITC is a fully refundable tax credit. It reduces a taxpayer’s liability based on earned income and number of qualifying children.

Taxpayers with children are eligible for a much larger credit than childless taxpayers, for whom the credit maxes out at $530 (temporarily increased for 2021 to approximately $1,500). Like the CTC, the EITC also phases out over a certain income range. The option here would retain the phaseout but change the benefits to a maximum credit of $1,000 per adult and an extra $1,000 for households with dependents.

The combined CTC and EITC reforms would benefit taxpayers across income distributions, with the largest benefits for low-income households. The bottom quintile would see incomes increase by 3.3 percent on what economists call a long-run dynamic basis. The net effect would be a slight reduction in marginal tax rates, boosting labor supply.

“The Tax Foundation is one of the premier nonpartisan organizations that objectively analyses tax issues and proposes realistic solutions,” said Jim Tobin, economist and president of Taxpayer Education Foundation (TEF). “This is a book that policymakers need to read.”