In its analysis of the tax reform plan proposed recently by Senators Marco Rubio (R-FL) and Mike Lee (R-UT), the Tax Foundation assumed the proposal would make the new personal credit ($2,000 for singles and $4,000 for married couples) fully refundable. This assumption helps explain why the group concluded the Lee-Rubio plan would be highly progressive.
Full refundability would be a significant departure from an earlier plan put forward by Senator Lee that the Tax Policy Center found would raise taxes on poor families. It would be equivalent to a cash transfer payment that every adult could receive even if they had no income or tax liability– they’d just need to file a return and claim it.
This change would be very advantageous for low-income households compared with the original Lee plan and, to a lesser extent, current law. However, the staffs of senators Lee and Rubio have not confirmed to us that the plan would make the credit refundable and there is no indication in the official document that this is true. In contrast, the document describes in detail the portion of the proposed additional child tax credit that is refundable.
A fully refundable personal credit would be a radical change. It would cause millions of Americans with no earnings and no other reason to file to become tax filers purely for purposes of claiming the credit. (In contrast, most recipients of the refundable Earned Income Tax Credit would file tax returns to claim a refund of withheld taxes even if there were no EITC.)
Such a credit also would create the potential for significant tax fraud since people would only need to possess a Social Security Number to be eligible. Without third-party reporting to establish eligibility for the credit, this provision would be very difficult for the IRS to enforce.
That said, while such a refundable personal credit has no precedent in US tax law, large unconditional cash payments have been proposed before. Conservative icon Milton Friedman advocated a negative income tax—basically a flat tax with a large refundable tax credit—as a replacement for welfare programs that discouraged work.
The Fair Tax, a national retail sales tax that some conservatives advocate as a replacement for other federal taxes, would include a very large “prebate”—i.e., cash grant—intended to offset the effect of the sales tax on families with incomes at or below the poverty level. However, critics have commented disapprovingly that the prebate would be “the largest entitlement program in American history.”
It’s possible that Senators Lee and Rubio intended to propose such a radical and expensive new cash transfer program, but it would be a big change to the tax law and it's one that deserves to be fully fleshed out in their written plan.
Follow me on twitter.
The “doc fix” passes the House. The House overwhelmingly approved the Medicare “doc fix” to replace automatic payment cuts (that Congress has delayed every year since 2003) with a temporary 0.5 percent annual hike in physician reimbursements. But the bipartisan deal, which CBO figures would add $141 billion to the deficit over 10 years, is […]
As you listen to House Democrats and Republicans sing kumbaya over their bipartisan agreement to fix the Medicare physician payment system, keep one thing in mind: The doc fix doesn’t fix much, and what it does repair likely will add hundreds of billions of dollars to the debt in coming years. The bill would accomplish one […]
The GOP House passes its budget. It promises to balance the books within 10 years by cutting spending by $5.4 trillion. Cuts include $2 trillion from repeal of the Affordable Care Act, $1 trillion from Medicaid and the Children’s Health Insurance Program, and $1 trillion from other unspecified benefit programs. Another $500 billion would come […]
Senate Finance Committee Chair Hatch wants a tax reform bill in 2015. Tax Analysts reports that the Utah Republican aims to mark up a bill later this year. Speaking at Arent Fox, LLP, yesterday, Hatch chided the Obama administration for “lacking engagement” in tax reform. While he wants to overhaul the entire tax system, Hatch […]
The House Republican Study Committee offers an alternative budget. The committee’s plan would cut spending by $7.1 trillion over the next decade but would give the Pentagon $570 billion for fiscal year 2016, well above the $523 billion spending cap set back in 2011. Revenues would change, too: The plan calls for just two individual […]
Politicians looking to “enhance revenue” without raising taxes might want to take a close look at Louisiana, where Governor Bobby Jindal may have found the promised land of conservative tax policy. He’s promoting a plan to raise $526 million without a tax increase. His trick: Turn refundable business credits into non-refundable credits. With a refundable […]
As the GOP gears up to make peace between House and Senate budgets, Senator Bernie Sanders has an idea about war funding. The GOP Congress will need to reconcile their budgets in the next several weeks—for the first time in a decade. They want to come together to repeal and offer an alternative to the […]
Spenders gonna’ spend, tax-cutters gonna’ cut… The House Budget Committee passed its $3.8 trillion budget, but only after giving in to GOP defense hawks: They got $20.5 billion in defense spending without offsets. Meanwhile, TPC’s Howard Gleckman tries to square the House GOP’s tax cuts with its no-tax-cut budget. He can’t. Nobody can—and it doesn’t […]
DOA budgets are hardly new. But House tax writers seem to be ignoring their own party’s fiscal plan. The House Budget Committee’s fiscal framework would not change expected revenues over the next 10 years. While it recommends enormous (though unspecified) spending cuts in an attempt to eliminate the deficit over the next decade, tax revenues […]