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The Rubio-Lee Personal Refundable Tax Credit

4 min readBy: Kyle Pomerleau

Update (11/3/2015): A previous version of this blog stated that the personal credit under Rubio-Lee would be $1,750. The credit is actually $2,000.

During last week’s Republican primary debate, Senator Marco Rubio and moderator John Harwood went back and forth about which taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers would benefit the most from Rubio’s tax plan. Both referred to our March analysis of the plan. Harwood pointed out that Rubio’s plan benefits top income earners more than the middle class. Rubio responded by pointing his plan benefits low-income taxpayers the most.

Our analysis of the Rubio-Lee plan from back in March shows that both of them were correct. High-income taxpayers would benefit from the plan more than middle-income taxpayers, but taxpayers in the bottom 10 percent of income earners receive the largest static and dynamic change in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. .

There are two main reasons why low-income taxpayers receive a large tax cut under this plan. The first is the new $2,500 child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . This credit is used to offset both the income tax and the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. of taxpayers with children. The second reason is that the plan replaces the personal exemption, the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , and the 10 percent tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. with a new per-person refundable credit. This credit would be available to all taxpayers and would actually result in many low-income taxpayers receiving more from the government than they pay.

Still, there seems to be a bit of confusion over how tax plan impacts low-income individuals: specifically, how exactly the Rubio-Lee (or the Rubio) personal credit works, who is eligible for the credit, and how we modeled the credit back in March.

The Rubio-Lee Personal Credit

The original Rubio-Lee plan replaced the personal exemption, the standard deduction, and the 10 percent tax bracket with a $2,000 personal credit. This credit would be fully refundable for all current taxpayers. So under the Rubio-Lee tax plan, income would be taxable starting at the first dollar of earned income, but all taxpayers would receive a large refundable credit to offset their tax bill.

For example, a single taxpayer earning $10,000 with no children under current law would receive a standard deduction and personal exemption of $10,300, and would thus have no taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . Their tax bill would be $0. Under Rubio-Lee, the same taxpayer would receive no personal exemption or standard deduction and would have a pre-credit tax bill of $1,500. However, the credit of $2,000 would fully offset the tax liability and push their tax bill below zero. The taxpayer would actually receive $500—a tax cut.

Who is Eligible for the Credit?

This actually seems to be the most contentious issue and would have a large impact on both who benefits from the tax plan and how expensive the plan would be. If Rubio’s plan did not include any rules about who is eligible for the personal credit, an individual would not need to owe taxes, or have income of any kind, in order to receive the credit, given that it is refundable. Any individual could just send in a tax return with just their name and address and receive the full credit. This is why some have characterized it as “universal basic income,” or a new, universal transfer program.

However, the campaign has articulated to us and to other media outlets that the personal credit would not be universally available. The credit would be limited to current tax filers and not be available to non-working, non-filing individuals. This means that the credit would be fully refundable to all current taxpayers and all future working taxpayers. Those who would file taxes simply to receive the credit would not be eligible.

How Did We Model the Tax Credit?

We modeled the personal refundable credit exactly as the Rubio campaign described it: limited to current tax filers. In fact, we are not able to model a more generous “universal basic income.” Our Taxes and Growth model uses the IRS Public Use File (PUF). This is a representative sample of over 100,000 taxpayers. Any changes to tax policy we model are limited to tax filers contained in the PUF. We are not able to model the impact of extending the credit universally. Thus, our distributional tables and revenue costs reflect the campaign’s limitations by default and are not exaggerating the benefit (or the cost).

Rubio 2.0

It is also worth mentioning that as of last week, Rubio released an update to the Rubio-Lee plan. This update changes a few things. One of the changes would phase-out the personal credit for high-income taxpayers. This phase-out would results in a slight decrease in the credit’s cost.

For more information on the Rubio-Lee Tax Plan see our March analysis here. For more information on all of the candidates’ tax plans, see our tax tracker here.