Protecting the Child Tax Credit at the Fiscal Cliff
The Child Tax Credit (CTC), a key piece of the safety net for low- and moderate-income families, is in jeopardy as the nation hurtles towards the fiscal cliff. Not only could the 2001 expansion of the credit die, but so could provisions in the 2009 stimulus that made the credit much more available to low-income families.
My biggest fear is that Congress will cut a year-end deal that extends the 2001 expansion but lets the important 2009 changes die.
To explain what’s happening, here is a bit of history: Prior to 2001, the credit was $500 per child. Families whose credit exceeded the income tax they owed could get the balance as a refundable credit only if they had at least three children and paid enough payroll tax. The credit phased out for single parents with income over $75,000 and married couples with income over $110,000.
The 2001 act doubled the credit to $1,000 per child and broadened its refundability. Families could receive 15 cents of their credit for each dollar of earnings over $10,000. (The threshold was indexed for inflation and would be about $13,000 in 2013.) Stimulus legislation in 2008 and 2009 reduced the threshold to $8,500 and then to $3,000. The more generous refundability level enacted in 2009 is critically important for low-income families.
Of the $38.3 billion in total child credits that TPC estimates families will claim this year, $29.5 billion comes from the 2001 tax law and another $8.8 billion from the 2009 stimulus. Most of the 2001 increase will go to families in the middle income quintile and higher (see chart). Families with the lowest incomes will get less than 3 percent of the 2001 increase. In contrast, fully 60 percent of the benefits from the 2009 changes will go to families in the lowest income quintile.
As we near the fiscal cliff, Congress should keep in mind the entire package of CTC changes, noting that the 2009 ARRA changes matter most for very low-income families.
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Big reform has to be on the agenda, without it everything will fall apart. One of the sad things is it is definitely going to get worse before it gets better, and having these beneficial tax systems in place can help provide great incentives.
Hmm is anyone else having problems with the images on this blog loading?
I’m trying to determine if its a problem on my end or if it’s the blog.
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[...] two most important pieces of the 2001-2011 tax cuts for low-income families were the reduced refundability threshold of the Child Tax Credit (CTC) and the 2 percentage point cut in payroll taxes. The American Taxpayer Relief Act of 2012 (ATRA) [...]
Unfortunately I am one of those people to which many out there speak of…but I would like to Preface My Comments with a HUGE THANK YOU to all of those people out there who have even made it possible for my family to rec an eic/child tax credit. Although I understand there is no such thing as a free lunch, I am also
realisitic about changes coming, my family wont be taking to the streets when the huge austerity measures come down…I was raised by people old enough to be my grand parents-great grandparents (depression era children/youth) who taught me to be Thankful for every thing that comes my way and to let go when things stop coming – letting go in our language meant we see the train coming down the tracks and make preparations, we can not expect uncle sam to hold our hand as we make the dangerous crossings in this life, we must realize as a nation – the welfare state of the past 70yrs is about to come face to face with reality! I only wish my employment in rural America paid more. But than again I choose to live here and no one made me live here. I just appreciate the eic/tax credit and understand if they go away, its a new chapter in all of our lives…once again THANK YOU to all of the HARD WORKING people who have paid into it over the years…I know you are out there and you read this, please know if you give from a pure conscience God will not forget you in the times ahead…just know that somewhere out there your eic/child tax credit made a HUGE difference to a struggling family in rural America. May G-d Bless You!
Arie
YES, yank the breeder rebate once and for all. I am sick of seeing these breeders get like 10 grand back because they can pop kids out. ENOUGH already.
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[...] and health insurance premiums paid by both employers and the self-employed. He’d maintain current rules for refundable credits such as the Earned Income Tax Credit and the Child Tax [...]
[...] refundable credits such as the Earned Income Tax Credit and the Child Tax Credit though in a much less generous form than [...]
[...] and health insurance premiums paid by both employers and the self-employed. He’d maintain current rules for refundable credits such as the Earned Income Tax Credit and the Child Tax [...]
[...] and health word premiums paid by both employers and a self-employed. He’d maintain current rules for refundable credits such as a Earned Income Tax Credit and a Child Tax [...]
[...] and health insurance premiums paid by both employers and the self-employed. He’d maintain current rules for refundable credits such as the Earned Income Tax Credit and the Child Tax [...]
[...] As the Tax Policy Center explained, “the more generous refundability level enacted in 2009 is critically important for low-income families“: Of the $38.3 billion in total child credits that TPC estimates families will claim this year, [...]
“the important 2009 changes” were always intended to expire. They were promoted as temporary stimulus. If the rationale for this provision has changed, let the provision expire and sell its replacement or reinstatement on the new rationale.
The same reasoning applies to the payroll tax cut and to all federal subsidies of state activities which were labeled “stimulus” in 2009 and then continued year after year.
The country can’t afford everything. What we choose to afford should be debated honestly.
For what it’s worth, progressives made an error when they failed to index the CTC phaseout thresholds way back in 1997. $110,000 back then was equivalent to almost $160,000 now. Erosion of the benefit has caused erosion of public support.
The Child Tax Credit and the 10% rate are what liberals want. The Defense Sequester repeal and the special rates for both dividends and capital gains are what conservatives want. Obama seems to hold all the cards right now and if he wins re-election, keeps the Senate and gets the House, he can craft reform on his own terms, especially with a strong Latino vote in Arizona and Texas electing Democrats to the Senate. If he loses, he has no incentive to do anything but let the economy drive off the cliff, so he has leverage in the lame duck. If the GOP wants to deal while they still have leverage, they need to strike a deal next week and hope Obama honors it.
Our opinion at the Center for Fiscal Equity is that cuts to the Mortgage Interest Deduction and Property Tax Deduction should be channeled to beefing up a consolidated CTC (along with getting rid of the Child Exemption and EITC). The CTC should be an offset to an employer-paid VAT-like Net Business Receipts Tax (a VAT with exemptions that has no border refundability or receipt visibility) so that families need not file taxes unless the CTC is either overpaid or underpaid.
Deficit reduction should come from initiating a VAT (which is affordable with a higher CTC) and preserving an income surtax for high income workers, investor and heirs with few, if any, exemptions and graduated rates so that high income individuals pay a higher rate than the merely well-off members of the middle class. The surtax should be dedicated to naval sea operations, overseas deployments and debt repayment (including for the FICA trust funds).
Entitlements should be funded by the NBRT (with domestic military and civil spending funded by the VAT), with a residual Social Security OASI employee payroll tax kicking in at where the EITC would have expired and kicking out when it gets to the 80th percentile of wage income.
The employer contribution would be funded by the NBRT and would distributed equally to all employees (and could be partially offset with personal accounts holding employer voting stock), with a high enough NBRT to make sure that the Base Payment can go up enough to offset an increase in Medicare Part B and Part D premiums to cover 35% of program cost – and then some. There would be no cap on the NBRT-side.
If big reform is not on the agenda, the other option is to trade extending CTC and 10% rate to eliminating the defense sequester as an offset to the other cuts already agreed to last summer and enacted through the spending caps and the Iraq and Afghansitan draw downs – roughly a $2 trillion deal, with everything else (Medicare cuts and comprehensive tax reform) kicked down the road until mid-summer next year (including the debt limit).