Fiscal Fact No. 6
Members of Congress are currently debating a small expansion of the $1,000 child tax credit that was left out of the recently enacted $350 billion 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. cut bill. This provision – which was enacted in the 2001 EGTRRA bill and scheduled to go into effect in two years – would immediately increase the “refundable” amount of the child tax credit for lower-income families.
Some, including the Washington Post, claim that failure to accelerate this provision “deprives millions of low-income families of a tax break for children.”
Nothing could be further from the truth. The only way in which these families could be denied tax relief is if they had an income tax liability in the first place. And they don’t.
On the contrary, the table below shows that low-income families not only do not have an income tax liability, but that they receive generous checks back from the government as a result of the “refundable” portion of the child credit and the Earned Income Tax Credit (EITC). While most Americans think of a “refund” as getting money back because you overpaid your taxes to the IRS, in this case “refundability” means you get a check back because you do not have a tax liability.
The example below is for a single mother with two children. This is example was chosen because 25 percent of tax filers in the lowest fifth (or quintile) are head of household. Married couples, by contrast, comprise just 13 percent of this group. For some of these families, the combined refundable benefit from the child credit and the EITC can exceed 40 percent of their income.
Table 1. Current Law: The 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. is refundable to the extent of 10 percent of the taxpayer’s earned income in excess of $10,500
|
Salaries and Wages |
Tax Liability Before Credits |
Tax Liability After Child Tax Credit ($1,000 per child) |
Remaining Refundable Child Tax Credit |
Refundable EITC |
Total Check From Uncle Sam |
Tax Refunds as a Percentage of Income |
Payroll Tax (15.3%) |
Percent of Payroll Tax Erased |
| $5,000 | $0 | $0 | $0 | $2,101 | $2,101 | 40.2% | $765 | 263% |
| $10,000 | $0 | $0 | $0 | $4,010 | $4,010 | 40.1% | $1,530 | 262% |
| $15,000 | $0 | $0 | $450 | $3,823 | $4,273 | 28.5% | $2,295 | 186% |
| $20,000 | $385 | $0 | $565 | $2,770 | $3,335 | 16.7% | $3,060 | 109% |
| $25,000 | $885 | $0 | $565 | $1,717 | $2,282 | 9.1% | $3,825 | 60% |
| $30,000 | $1,578 | $0 | $373 | $664 | $1,037 | 3.5% | $4,590 | 23% |
Source: Tax Foundation
It’s often argued that while these families do not pay income taxes, they do pay other federal taxes such as payroll (or Social Security) taxes. Here again, the table shows that for most of these families, the combined benefit from the child credit and the EITC more than erases their payroll taxes too.
Another issue that has been lost in this debate is the fact that the most recent tax bill increased the number of tax filers with zero-tax liability by 3.8 million, to a record 40 million. As Table 2 shows, since 2000, nearly 10 million tax filers have been taken off the tax rolls because of the last three tax cut bills. Nearly 30 percent of the roughly 133 million tax filers this year will have no income tax liability. This is twice as many non-paying filers as there were in 1980.
Table 2. Growing Share of Zero-Tax Filers
|
Year |
Number (Millions) |
Percent of All Filers |
|
1980 |
18.6 |
19.8% |
|
1985 |
16.7 |
16.5% |
|
1990 |
21.5 |
19.0% |
|
1995 |
26.7 |
22.6% |
|
2000 |
29.9 |
23.1% |
|
2003 est. |
39.5 |
29.5% |
| Source: IRS Statistics of Income, 2003 Tax Foundation estimate. |