Tuesday, October 21, 2008
The tax code has always contained provisions that reduce the income tax burden for low-income workers, such as the standard deduction, personal exemption, and dependent exemption. Between 1950 and 1990, the percentage of tax filers whose entire tax liability was wiped out by these provisions averaged 21 percent. Since then, lawmakers have expanded credits�such as the earned income tax credit (EITC)�while creating a plethora of new credits, including the child tax credit, the HOPE credit, lifetime learning credit, and the credit for adoption expenses.
Most tax credits can only reduce a taxpayer's amount due to zero, but the EITC and the child tax credit were also made refundable, meaning that taxpayers are eligible to receive a check even if they have paid no income tax during the year. Those tax returns have become, in effect, a claim form for a subsidy delivered through the tax system rather than a direct payment from a traditional government program like welfare or farm supports.
As shown in Table 1 below, the Tax Foundation estimates that there will be 47 million tax returns with zero income tax liability in 2009 under current law. That's one-third of all tax returns, and those 47 million tax returns represent 96 million individuals.
Both the McCain and Obama plans would increase this number by expanding existing tax benefits or creating new ones. Senator McCain is proposing one expanded provision�the dependent exemption�and one new credit, a $5,000 refundable health care tax credit. The Obama plan contains seven new provisions, including a new "Making Work Pay Credit," a "Universal Mortgage Credit," and a plan to eliminate income taxes for seniors earning under $50,000.1
Taken together, the Tax Foundation estimates the McCain proposals would increase the number of nonpayers by about 15 million, bringing the total number of taxpayers who pay no personal income taxes to 62 million, roughly 43 percent of all tax filers. Almost all of this is due to McCain's health care credit, which dramatically realigns health care incentives and gives people a powerful motive to buy health insurance. This tax provision has a bigger impact on cutting people's taxes than any single proposal from either party.2
Source. See also this on the McCain health plan. (h/t: Mankiw.)
I am on the local United Way board of directors, and one of the UW's foci is on "financial stability". One of the largest programs I see run under that banner is a program to help low-income families file for the earned income tax credit. (Here's an example from Seattle.) EITC has been frequently abused, to the tune of over $8 billion. It takes 15-20 minutes online to figure out if you even qualify, let alone fill out the form and be sure to carry that over to 1040A (no EZ for the EITC claimer.) Now we have one candidate proposing a single tax credit to put health benefits on an equal footing with cash wages, while the other is proposing seven additional credits. How difficult will the new tax forms be, and where will we get the volunteers to help file them?
To bet on Obama, perhaps you should go long on H&R Block.
Oh, and guess who loves EITC? And even helps with filings? ACORN. Can't wait to read Mickey Mouse's tax return.