Who Deserves a Tax Credit?

Congress passed a new child tax credit bill last week amid partisan controversy, clashes between the House and Senate chambers, and the usual class-warfare rhetoric.  The debate raised uncomfortable questions about which Americans “deserve” a tax break, but the larger question- whether government deserves so much of our money- went unaddressed.

The biggest issue was whether lower-income Americans, who often pay little or no income taxes, ought to get a child tax credit.  This is a legitimate question when we consider some have zero tax liability because they do not work at all.  If an individual truly pays no federal taxes, then any payment he receives from the government is not really a “tax credit,” but rather a welfare payment.

An overwhelming majority of the poor do work, however.  The working poor certainly do pay federal taxes in the form of payroll taxes, also known as FICA.  Even a minimum wage worker clocking 40 hours per week would pay hundreds of dollars annually in payroll taxes.  So if Congress really wants to help the working poor, payroll taxes must be lowered.  But while the self-styled champions of the poor continually clamor for income tax increases and more social services spending, they ignore the obvious and immediate benefits of a payroll tax cut for low-income workers.

The embarrassing problem for the poverty crowd in Washington is that payroll taxes fund Medicare and Social Security benefits.  Despite all the talk about trust funds and lockboxes, payroll taxes are spent immediately to pay current beneficiaries of those programs.  Any cut in payroll taxes therefore threatens to expose that Social Security “accounts” contain only IOUs.  This is why the left is reluctant to truly help the poor by lowering or eliminating payroll taxes.

I’m for lowering everybody’s federal tax bill, because I believe every dollar left in the private economy benefits all Americans much more than a dollar sent to Washington.  Therefore, I believe tax credits should be refundable against both income and payroll taxes.  For a poor family scraping by on $15,000 per year, a $300 or $500 refund of payroll taxes could be enormous.

The changes to the child tax credit are not final, because the House and Senate have not yet reconciled their differences.  However, the likely changes can be summarized as follows:

·     For middle-income families, the current child tax credit of $600 increases to $1,000 for 2003 and 2004.  If the House version prevails, this increase will stay in effect through 2010.  If not, the credit will stupidly revert to $700 in 2005 and increase to $1,000 by 2010.

·     Lower-income families making between $10,500 and $26,000 get no relief in 2003, but must wait until 2004 to apply for a refundable child credit.  In 2004 they are eligible for a credit of 15% of earned income.

·     Currently the child credit is phased out for individuals making over $75,000 and couples making over $110,000.  Both the House and Senate proposals are likely to increase that amount to $150,000 for married couples.

·     Middle-income families who qualified for child credits last year will begin receiving $400 per child advance refund checks for 2003 at the end of July.