The Magazine

Credit Where Credit Is Due

Republicans should see the Democrats' tax cut, and raise it.

Jul 28, 2003, Vol. 8, No. 44 • By JEFFREY BELL and STEPHEN MOORE
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EVER SINCE the Bush tax cut passed nine weeks ago, the left has been foaming at the mouth over the supposed injustice done to low-income workers who were left behind with no income tax relief. Of course, anyone who even casually follows these debates knows the reason these workers did not receive an income tax cut: They don't pay any income tax.

According to the nonpartisan Tax Foundation, most of these low-income workers are already almost totally reimbursed for the income and payroll taxes they pay, through the earned income tax credit. Nonetheless, to address the PR problem of some non-income-tax-paying workers receiving no tax relief from the new Bush tax cut, the Senate has passed legislation moving up the "refundability" of the child tax credit, which would have happened under President Bush's 2001 tax cut in 2005.

Here's how it works. For a worker with an income of $20,000 and two kids, if the new child credit is made fully "refundable" (i.e., the worker receives a check for the amount of the child credit above the family's federal income tax liability), the family would receive a $2,883 check from Uncle Sam, based on the combined child and earned income credits. But the total payroll and income tax burden for this family would be only $1,915. Hence, the family receives $968 more in payments than it pays in taxes.

What's more, the House Ways and Means Committee reports that the total amount of all taxes paid by this $20,000 income family--federal income taxes, payroll taxes, state income taxes, local taxes, and even sales taxes--would be $2,878, which is slightly less than the amount of the "refundable" check the government would be sending this family. This is Tom Daschle's concept of tax fairness.

Here's the bottom line in this debate: The left wants tax cuts for several million people who don't pay any federal taxes. All that makes this refundable "tax cut" different from a conventional welfare check is that to qualify for these payments, the parent must work--which is, admittedly, an important difference. Still, the program is more income-redistribution than tax equity, and its ultimate effect will be to take more American families off the income tax rolls entirely. The bottom 50 percent already pay only 5 percent of all federal income taxes. This would tilt the overall tax burden further up the income scale.

The Republicans can avoid an embarrassing unconditional surrender on this issue by using the left's "fairness" rhetoric against them and making the $1,000-per-child credit truly available to all workers. The biggest inequity of the child tax credit is not at the lower end of incomes, but at the income range for middle-income families. The purpose of the child credit is to acknowledge that the larger one's family is, the more one's income should be dedicated to child-rearing expenses, and not intercepted by the tax collector. Many middle-income families will be angry when they discover that because of income caps on the credit (caps the Democrats insisted upon), they won't receive the full $1,000-per-child tax cut. In fact, once families hit an income of $110,000 a year, the child credit begins to phase out. Evidently, liberal Democrats believe these families are rich. But few of these families probably feel affluent. In a high-cost state like New York or California, a $110,000 income is what an electrician married to a schoolteacher might jointly earn--hardly a family basking in the joys of idle wealth.

More outrageous is that the child credit disappears altogether for families making $150,000 or more, no matter how many dependent children are in the home. Why should a low-income family that pays no income tax receive a payment for kids, but not a family that does pay lots of income taxes with an income of just over $150,000? This is the real tax injustice that should be remedied.

Even more important in terms of work and investment incentive (which is what the Bush "stimulus" tax cut is all about), this tax credit phase-out raises marginal tax rates for families earning between $110,000 and $150,000 by about 5 percent. This more than cancels out the income tax rate cuts for families in this income range.

House conservatives should insist that if the child credit is made available to people at the bottom, it should be made available to every American--regardless of income. Phasing out tax credits penalizes families when they work harder to get ahead; such phase-outs are at the heart of what Americans have come to hate about the modern-day income tax. If the Daschle Democrats want to make the tax credit universally available--then so be it. House majority leader Tom DeLay has exactly the right take on this debate: "When Democrats decide to give a $1,000 tax break to everyone and not discriminate against anybody and extend those out, we'll have a bill to make that happen." Now that would strike a real blow for tax fairness.

Stephen Moore is president of the Club for Growth. Jeffrey Bell is a principal of Capital City Partners, a Washington consulting firm.