$318 Billion Deal Is Set in Congress for Cutting Taxes

Republicans and the Earned Income Tax Credit

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"Republicans are having a hard time getting traction on the idea that it is wrong to increase refundable child tax credits to families with no income tax liability. It's not a question of being stingy-many are genuinely concerned about the growth of a non-taxpaying class that potentially can vote subsidies for itself under the guise of tax reduction. In practice, however, this is less of a problem than it appears.


In truth, Republicans have no one but themselves to blame for the mess they have gotten into. It was they who invented the first refundable tax credit, the Earned Income Tax Credit (EITC), back in the 1970s. And it was Republicans who invented the child credit in the 1990s. Both were bad ideas that have come back to haunt them.

The EITC has a sterling Republican heritage. It was first instituted in the 1920s by a Republican Congress at the instigation of Treasury Secretary Andrew Mellon. Repealed in 1943, Republican President Gerald Ford revived it in 1975. In part, Ford was responding to the argument for a negative income tax that had been advanced by free-market economist Milton Friedman.

Advocates of the EITC in the 1970s made two principal arguments. First, rising payroll taxes meant that many low-income workers now paid more of these taxes than they paid in income taxes. But it was impractical to cut their payroll taxes because there was a strong tradition of having a single tax rate that every worker paid on the first dollar of earnings. Supporters of Social Security viewed this as essential to the structure of the system, so that workers would view the money withheld as a "contribution" rather than a tax. Moreover, Social Security's finances were precarious in 1975, having required a big tax increase just two years earlier.

Second, EITC supporters argued that because the credit would be available only to those with earned income, it would reinforce work incentives and help get people off welfare. By making the credit refundable, it would offset the disincentive effects of higher payroll tax rates, which had risen from 4.8 percent on workers and employers in 1970 to 5.85 percent in 1975. The legislative history makes clear that Congress and the White House both viewed the EITC as a de facto payroll tax cut, not a welfare program.

In the 1980s, Ronald Reagan supported a big increase in the EITC rate from 10 percent to 14 percent. In 1990, George H.W. Bush supported a further increase. But it was not until Bill Clinton's administration that the EITC really became an all-purpose welfare program. As a result, spending shot up. The refunded portion of the credit, which is scored as direct spending in the budget, rose from $10 billion in 1992 to $26 billion in 2000. Even before welfare reform significantly reduced outlays for Aid to Families With Dependant Children, the federal government's principal welfare program, the refunded portion of the EITC was greater. Now it is two and a half times greater.

Despite the exploding cost of the EITC, Republicans in Congress created another tax credit in the 1997 tax bill. The child credit was intended to make it easier for mothers to stay at home and raise their children, rather than work outside the home. Although not refundable at first, it was in effect refundable for many because it increased their EITC payments. In 2001, the child credit was made explicitly refundable. Shortly, Congress will likely increase its refundability still more.

As a result of the EITC, the child credit and other tax cuts, the percentage of those with no income tax liability has risen to 30 percent of all tax filers, according to the Tax Foundation. The combination of EITC and the child credit offsets 100 percent of the income tax liability for almost all families with incomes below $30,000.

And because of refundability, 100 percent of the payroll tax is also offset for those with incomes below $20,000. Those with earnings below $10,000 pay no income taxes and get a check from the government for 2.6 times their payroll tax liability.

Some now worry that having so many citizens free of taxation is a threat to democracy. In principle, there is nothing to stop them from voting themselves larger and larger benefits at the expense of the taxpaying class. Offsetting this possibility, however, is the fact that those with low incomes vote in low percentages, while those with high incomes vote in high percentages.

Thus, in practice, the electoral clout of the taxpaying class has tended to rise as it bears more and more of the total tax burden. That is why Republicans control Congress and the White House despite the growth of non-taxpayers.


Bruce Bartlett is a senior fellow at the National Center for Policy Analysis, a TownHall.com member group."

oops!

Last question: Yes, I believe they'd do that. For sure. But that's not the point. The point is that Bush said something he knew was not true and based a war on it. McG -- we're in the wrong thread for this discussion.

Thanks Tartarin...sorry about that.

USA

Few Americans likely to escape higher taxes

Posted: Friday, June 13, 7:53am EDT

Fines, fees, surcharges, taxes: Whatever you call it, cash-strapped states are seeking billions of new dollars from their citizens, enough to potentially double the load of new taxes this year and erase much of the windfall American taxpayers enjoyed in the 1990s.
An Associated Press analysis of budget work in all 50 states found many are trying to target their tax hikes or increase fees - allowing politicians to make claims that they did not raise income taxes. But those states that have raised across-the-board taxes such as income, sales or property taxes will get more money.

The targets: Smokers, drinkers, gamblers. Drivers and traffic offenders. Businesess small and large.

But, in the end, few will escape the pain as states confront billion-dollar gaps between the amount of money they gather and the amount they spend.


So far, of the 21 states with budgets signed into law for the fiscal year that begins in July for all but four states, Americans will pay $4.3 billion in new taxes and $2.3 billion in new fees.

Another $14 billion in proposed taxes and $2.4 billion in possible fees remain on the table in 29 states, including some of the most expensive proposals in states like California, Connecticut and Pennsylvania. In 10 of those states, legislatures have passed spending plans but governors have not yet signed them.

The hikes are chipping away at the $35.7 billion in state taxes cut during the 1990s. Since the economy went sour, states raised $9.1 billion in new taxes; this year, more than twice that is possible now - some $18.3 billion in new and proposed taxes.

While states scramble for money, the federal government is cutting taxes. What does that mean to the average American? Some will pay more to their state than they get back from Washington, others will come out ahead - depending on where they live and their habits, like smoking, drinking or speeding.

I still want my share of the child credit. Even though I have no children,my taxes have gone to pay for schools,playgrounds,and every other progran "for the children" So,since I have been forced to pay for other peoples choices,dont I qualify for the credit also?
Also,why do we end the credit when a kid is 18?If its that important,shouldnt we extend the credit so that you qualify for as long as your kids are alive? If its that important,it only seems reasonable to me that you get the credit forever.
Also,why are none of you even mentioning that the credit was in the original bill,but was killed by senate dems that were insistent on that mythical $350 billion figure? The Senate was forced to remove it to say at that figure,and once the dems realized they had killed that part,they raised hell and blamed Bush.
So,if people that dot pay taxes are entitled to a rebate and credit on their taxes,then I am entitled to the child care credit also.

Taxation is a farce. Here in California where we have Prop 13 that limits property taxes, every other taxes have gone up. Our income tax rate is 9 percent, and our sales tax will also go to 9 percent this year to fill in the shortfall. Many fees such as car registration is also increasing this year. You add in all the taxes, and most middle-class Californians are paying over 50 percent in taxes. c.i.

CI - Rather than decrying the tax burden, you should be decrying the mindset that suggests that government should do and be all things for all people. Californians have for too long asked their government to do more and more and elected people who want government to do more and more, and the government you have elected is merely trying to extract from you the money it needs to do all the wonderfully well-intentioned things for which Californians have been clamoring.

Reduce your expectations of government, and you will likely see their expectations of your tax dollars shrink proportionally.

Scrat, That's the reason I'm not a democrat or republican. Their extremes are the bane of taxation and spending. As a 'moderate,' I see nothing wrong with increasing taxes to fill in some of the gap, but government reps must first learn to control spending first and foremost, and save for a rainy day when things are good. c.i.

Here's a very good example; the San Jose City government have asked all departments to cut back on their spending by ten percent, but managed to increase their car allowance by $3,000 per month. The majority of the city government said they will donate that to charity, but the mayor said he's going to keep it. Yeah, you bums, cut your cost so's we can increase our benefits. c.i.

The current regime has created more new $ spendings than any government - ever. The Republicans just don't count those $ because they go to the military. Get real, it is new spending - period

Sounds good to me.

Bill, don't forget to take nto account the price of things and inflation over past presidencies. Don't let the actual dollar amount fool you. Find a link that has adjusted dollar amounts to base this on.

What we base it on, McG, is "our" reality. All of our income does not increase at the rate our government has a penchant for spending 'our' money. They have the gall to give social security beneficaries a 1.7 percent increase, while they increase their spending by triple that amount - mostly for stuff we shouldn't. c.i.

Just bear in mind the percentage compared to the GDP. 4% then compared to 4% now, etc...

According to some economists, the $318 billion tax cut will really cost our government over $500 billion in revenues. Interesting, that! c.i.

House votes to eliminate estate taxes

WASHINGTON (AP) -- The House voted Wednesday to permanently end taxes on inherited estates, rejecting a Democratic effort to retain the tax for the country's wealthiest families.
"What we're talking about here is fairness to families," said House Speaker Dennis Hastert, R-Illinois. "They ought to have the comfort and relief to pass that business on to the next generation, to their children and to their grandchildren."
The bill, passed 264-163, would permanently abolish taxes on estates and reduce revenue by $162 billion through 2013. A law passed in 2001 eliminates the tax in 2010, only to resurrect it a year later, a quirk forced by Senate rules designed to prevent lawmakers from deepening budget deficits.
A nearly identical bill that passed last year died in the Senate, and this year's bill will probably meet the same fate.
"I don't think they have the votes to repeal, but we're only talking about 1.5 percent of the people who pay estate taxes today who would be affected by repeal," said Senate Minority Leader Tom Daschle, D-South Dakota.

This Administration must take care of it's own. . The very rich. http://www.cnn.com/2003/ALLPOLITICS/06/18/estate.tax.ap/index.html

The only thing this administration has done is things that further enrich the rich!

Hurray!

cjhsa
Don't be too quick to say hurray. Unless you are really wealthy, over $500.000/yr the Alternate minimum tax will get you. It seems it has never been adjusted for inflation. More and more middle class wage earners are now being included.
There was an article explaining the inpact but I have been unable to find it again. Anyone care to expound.