Republicans and Refundable Tax Credits
By Laurence Vance
The so-called Bush tax cuts were, unfortunately, set by Republicans to expire at the end of 2010. Although they were extended, with modifications, and then extended again, with more modifications, this Republican blunder has led—like so many of their other actions—to an increase in the welfare state.
The Bush tax cuts, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), added a 10 percent tax bracket, set the tax rates of the others at 15, 25, 28, 33, and 35 percent, increased the child credit to $1,000, lowered the long-term capital gains and qualified dividend tax rates to 15 percent, increased the Section 179 expense deduction to $250,000, gradually eliminated the “PEP and Pease” personal exemption and itemized deduction reductions, and gradually eliminated the estate tax.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) extended most of these provisions. Although the estate tax was revived, the Section 179 expense deduction was extended and increased.
But after this expired at the end of 2012, Congress passed, with the help of Republicans, the American Tax Relief Act of 2012. The six tax brackets were made permanent, but for those making over $400,000 a year ($450,000 for married couples), the top marginal tax rate increased to 39.6 percent. Additionally, the estate tax rate increased, the tax rates on long-term capital gains and dividends were raised on higher-income taxpayers, and the personal exemption and itemized deduction reductions were reinstated. But the worst thing about the American Tax Relief Act is its expansion of refundable tax credits.
Tax deductions reduce the amount of income subject to tax. Their brothers, tax credits, reduce the amount of income tax owed. Since there is no chance whatsoever—as long as Democrats and Republicans star in the dog and pony show that is the U.S. government—that the income tax will ever be eliminated, tax deductions and tax credits are important for Americans who want to keep more of their money in their pockets and out of the hands of Uncle Sam. Tax deductions and tax credits, along with their cousins tax breaks, tax exemptions, tax exclusions, tax incentives, tax loopholes, tax avoidance schemes, and tax shelters, are not subsidies that have to be “paid for.” It doesn’t matter what the deductions and credits are for, how much they are, whom they benefit, or why they were instituted, they are always a good thing, no matter how complex they make the tax code or what hurdles taxpayers must jump through to use them. Because these things lower the amount of taxes owned by Americans to the monstrosity that is the U.S government, any attempt to eliminate them should be seen as an attempt to raise taxes.
A regular tax credit may reduce the amount of tax owed down to zero. However, if there is no taxable income to begin with—due to tax deductions, exemptions, or otherwise, then no credit can be taken.
A refundable tax credit is treated as a payment from the taxpayer, such as federal income tax withheld or quarterly estimated taxes paid. If the “payment” is more than the tax owed, the taxpayer receives a refund from the government of money he never had withheld or paid in.
The American Taxpayer Relief Act relieves some American taxpayers of their money and transfers it to other Americans who are not taxpayers.
According to the Tax Foundation, the major changes to refundable tax credits in the American Taxpayer Relief Act (ARRA) are as follows:
- The Earned Income Tax Credit (EITC) was given a new category for families with three or more children. (Prior to 2008, all families with two or more children were treated alike.) The EITC’s phaseout was also increased by $5,000 for married couples filing jointly, reducing the marriage penalty for families with two working adults. This $5,000 difference was indexed to inflation and has crawled upwards to $5,340.
- The minimum earned income required to qualify for the Additional Child Tax Credit was changed to $3,000. Before ARRA, this amount was set to rise to $12,550. This change both increases the number of taxpayers eligible for the credit and increases the amount they may receive.
- The American Opportunity Tax Credit was a new refundable credit built into ARRA. It gives qualifying taxpayers up to a $2,500 credit for qualifying education expenses. It was one of the fastest growing tax credits between 2010 and 2011, and by 2011, its refundable portion represented $6.57 billion in outlays.
The Earned Income Tax Credit is up to $6,044 for individuals with three or more qualifying children and earned income of less than $46,227 ($51,567 for married couples), up to $5,372 for individuals with two qualifying children and earned income of less than $43,038 ($48,378 for married couples), up to $3,250 for individuals with one qualifying child and earned income of less than $37,870 ($43,210 for married couples), and up to $487 for individuals with no qualifying children and earned income of less than $14,340 ($19,680 for married couples).
The Additional Child Tax Credit is the refundable portion of the Child Tax Credit. Individuals who are unable to take full advantage of the $1,000 per child tax credit because their tax owed is less than the amount of the credit are entitled to a refund of the smaller of the remaining Child Tax Credit and 15 percent of taxable earned income that is over $3,000, up to $1,000 per child.
The American Opportunity Tax Credit is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student. Forty percent of the American opportunity credit is refundable. That means that an amount up to $1,000 per student can be refunded over and above what an individual paid in.
Refundable tax credits are welfare for the masses. They are also a huge wealth redistribution scheme. They are also the ultimate form of welfare because they are cash payments that do not count as income.
So what do refundable tax credits have to do with Republicans? Everything. And not just because they helped pass the American Taxpayer Relief Act that expanded refundable tax credits.
The worst of the refundable tax credits—the Earned Income Tax Credit—was instituted under Republican president Gerald Ford, increased under Republican president Ronald Reagan and the Republican majority he had in the Senate for six years, expanded under Republican president George H. W. Bush, skyrocketed under Democratic president Bill Clinton even though he had a Republican majority in both Houses of Congress for six years, and continued increasing under Republican president George W. Bush and the Republican majority he had for over four years.
Let me be more specific. The Republicans controlled both Houses of Congress and the presidency from the inauguration of George W. Bush on January 20, 2001, until May 24, 2001, when Republican senator Jim Jeffords switched from Republican to Independent and ended Republican control of the Senate. The Republicans regained control of the Senate in the 2002 midterm election, and then again controlled both Houses of Congress from January of 2003 until January of 2007. This means that for a period of four months and then for a period of four years without interruption the Republicans controlled both Houses of Congress and the White House. The last time the Republicans had absolute control of the government like this was during the first two years of the presidency of the Republican Dwight Eisenhower—1953-1955.
Republicans could have put an end once and for all to the Earned Income Tax Credit and every other refundable tax credit. They could have eliminated them at one fell swoop or they could have eliminated them gradually—but they could have eliminated them.
But just like Republicans didn’t eliminate or scale back other welfare programs when they had the chance, so they didn’t eliminate or scale back any refundable tax credits. Even worse, Republicans have continued to increase funding for refundable tax credits and other welfare programs like Temporary Assistance to Needy Families (TANF), Medicaid, food stamps, the National School Lunch Program (NSLP), Women, Infants, and Children (WIC), energy assistance, housing assistance, the State Children’s Health Insurance Program (SCHIP), and Supplemental Security Income (SSI).
Republicans support the welfare state with same fervor as Democrats. And yet the myth persists that they oppose welfare and the redistribution of wealth and support the Constitution and limited government. In both cases, nothing could be further from the truth.
Those of you who haven’t filed your taxes yet because you owe the government more of your money and are waiting until April 15th to file should keep in mind that millions of Americans rushed to file their taxes at the end of January because they were expecting a large refund of your money, thanks to refundable tax credits. And thanks to Republicans who make it all possible.
Laurence Vance is an Associated Scholar of the Mises Institute.