1. Using Refundable Tax Credits to Help Low- income Taxpayers by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma Tax Policy Colloquium Loyola Law School Los Angeles, California August 30, 2010

2. Income Inequality Gini coefficient Interdecile ratio P90/P10 Interdecile ratio P50/P10 LevelRankLevelRankLevelRank Australia0.30163.95152.0918 Canada0.32184.12172.1420 Mexico0.47308.53302.8630 Sweden0.2322.7921.721 United Kingdom0.34234.21181.9915 United States0.38275.91272.6929 OECD-300.31..4.162.09.. 2 http://dx.doi.org/10.1787/420888675468

3. Income Inequality, cont. Interquintile share ratio (S80/S20) Interdecile ratio (P90/P10) Australia 4.84.0 Canada 5.24.1 Mexico12.18.5 Sweden 3.32.8 United Kingdom 5.44.2 United States 7.95.9 OECD-30 5.34.1 3 http://dx.doi.org/10.1787/421061637532

4. Inequality and Redistribution Country Gini Before Gini After Poverty Before (50% of median income) Poverty After (50% of median income) Tax % GDP Social Spending %GDP Australia0.460.328.612.430.617.1 Canada0.440.3223.112.033.316.5 Mexico n/a0.4721.018.420.67.0 Sweden0.430.2326.75.349.129.4 United Kingdom0.460.3426.38.337.121.3 United States0.460.3826.317.128.015.9 OECD0.450.3126.410.635.920.5 4

5. 5 Inequality & Child Poverty in Selected Countries

6. 6 Social Spending & Child Poverty in Selected Countries

7. Redistribution through Cash Transfers & Taxes Transfers to lowest quintile Taxes from lowest quintile Net transfers to lowest quintile Australia5.90.25.8 Canada3.50.62.9 Korea0.90.50.4 Sweden8.52.85.7 United Kingdom4.60.44.1 United States2.30.41.9 OECD-235.41.24.2 7 http://dx.doi.org/10.1787/422058728151

8. Tax-to-GDP Ratios, 2007 Country Income Taxes Payroll taxes Consumption Taxes Total Taxes Australia18.4- 8.230.8 Canada16.6 4.8 7.933.3 United Kingdom14.3 6.610.536.1 United States13.9 6.6 4.728.3 OECD Total13.2 9.110.935.8 8 Source: Organisation for Economic Co-Operation and Development, Tax revenue statistics, tables O.1, O.2, O.3, and O.5, http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html#trs. http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html#trs

9. U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2010 Unmarried individuals Heads of household with one child Married couples filing joint returns with two children Standard deduction$5,700$ 8,400$11,400 Personal exemptions$3,650$ 7,300$14,600 Simple income tax threshold $9,350$15,700$26,000 9

10. Tax Rate Schedules for Various Taxpayers, 2010 10 Tax rate Rate bracket Unmarried individuals Heads of household with one child Married couples filing joint returns with two children 10$0 to $8,375$0 to $11,950$0 to $16,750 15$8,375 to $34,000$11,950 to $45,550$16,750 to $68,000 25$34,000 to $82,400$45,550 to $117,650$68,000 to $137,300 28$82,400 to $171,850$117,650 to $190,550$137,300 to $209,250 33$171,850 to $373,650$190,550 to $33,650$209,250 to $373,650 35Over $373,650

11. “Making Work Pay” Credit New refundable credit I.R.C. § 36A (ARRA §1001) Will cut taxes for working families Up to $400 ($800 if MFJ) –Computed as 6.2 percent of earned income up to $400 ($800 if MFJ) Phase out for taxpayers with modified AGI > $75,000 ($150,000 MFJ) Claim credit on 2010 tax return Tax withholding decrease 11

12. Earned Income Tax Credit (EITC) Increase New credit percentage for 3 or more qualifying children –I.R.C. § 32 (ARRA § 2002) –Temporary increase 2009 & 2010 –Computed as 45% of earnings (up from 40%) Maximum credit increased to $5,666 in 2010 Maximum AGI increased to $48,362 in 2010 12

13. Child Tax Credit $1,000 per qualifying child –I.R.C. § 24 (ARRA § 1003) Temporary expansion of eligibility for refundable credit More lower income families qualify: –2008 – threshold amount was = $8,500 –2009 and 2010 – threshold amount = $3,000 13

14. Poverty Levels & Net Federal Tax Thresholds, 2010 Unmarried individual Single parent w/ 1 child Married couple w/ 2 children Married couple w/ 3 children 1. Poverty levels$10,830$14,570$22,050$25,790 2. Simple income tax threshold (before credits) $9,350$15,700$26,000$29,650 3. Income tax threshold after credits $13,395$32,380$50,250$60,567 4. Employee payroll tax threshold $0 5. Combined income & payroll tax threshold $9,348$25,717$38,635$43,788 14

15. Taxes at Poverty Level, 2010 15 Unmarried individual Single parent w/ 1 child Married couple w/ 2 children Married couple w/ 3 children 1. Poverty levels$10,830$14,570$22,050$25,790 2. Income tax at poverty level (after credits) -$453-$4,450-$7,712-$8,554 3. Employee Social Security & Medicare tax at poverty level $829$1,115$1,687$1,973 4. Combined income & payroll tax at poverty level $376-$3,335-$6,025-$6,581 5. Combined tax as a % of income at poverty level 3.5%-22.9%-27.3%-25.5%

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17. Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) 17 2009 actual2015 estimate Social Security$678$893 Medicare 425 651 Medicaid 251 336 Unemployment compensation 119 65 Supplemental Security Income 41 52 Earned income tax credit 42 45 Child tax credit 24 26 Making work pay tax credit <1 n/a Food assistance 72 89 Family support 26 25 Housing assistance 10 5 General retirement and disability 8 10 Federal employee retirement and disability 118 141 Veterans benefits and services 49 84

18. U.S.: Share of Household Income & Gini Index, 2005 Market incomeDisposable income Quintiles Lowest 1.50 4.42 Second 7.26 9.86 Middle14.0015.33 Fourth23.4123.11 Highest53.8347.28 Gini Index0.4930.418 18

19. Canada Canada Child Tax Benefit (CCTB) –C$112.33 for each child under age 18 National Child Benefit Supp. (NCBS) –Up to C$174.00 per month Child Disability Benefit (CDB) –Up to C$205.83 per month Universal Child Care Benefit (UCCB) –C$1,200 per year for children under 6 19

20. Canada, cont. Working Income Tax Benefit (WITB) –refundable tax credit of 25% of earned income in excess of C$3,000 –maximum of C$925 for individuals (C$1,680 for single parents and couples) Refundable Goods and Services Tax Credit –C$250 for taxpayer, spouse or partner –C$131 for each child 20

21. United Kingdom Child Benefit –£20.30/week oldest child; £13.40 others Child Tax Credit –£545 per year/family+ £2,300/child Working Tax Credit –£1,920 per year per worker –+ 80% × child care, up to £140/week for 1 child; £240/week for 2+ children 21

22. Australia Family Tax Benefit –Part A: up to A$4,905.60 child under 13; A$6,161.20 child 13-15; etc. –Part B: extra help for low-income single parents & families with one main income Baby Bonus –$5,294, paid in 13 fortnightly installments Child Care Tax Rebate –50 percent of out-of-pocket child care 22

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24. How an Integrated Tax & Transfer System Would Affect a Single Parent with 2 Children ($2,000 Personal Tax Credits, $2,000 per Worker Credits, and 20 & 35% Tax Rates) 24 Pre-transfer earnings Plus personal tax credits Plus worker credit Less tax imposed After-tax income 0 $6,000 0 0 $10,000 $6,000$2,000 $16,000 $20,000 $6,000$2,000 $4,000 $24,000 $50,000 $6,000$2,000 $10,000 $48,000 $100,000 $6,000$2,000 $27,500 $80,500 $200,000 $6,000$2,000 $62,500$145,500

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26. $2,000 per Worker Earned Income Credit, with or without a Phase-out (Credit = 20% ×1 st $10,000 of earnings)

27. About the Author Jonathan Barry Forman (“Jon”) is –the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law, teaching tax and pension law; –the author of Making America Work (Washington, DC: Urban Institute Press, 2006); and –was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year. Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan and master’s degrees in both economics and psychology. Jon can be reached at jforman@ou.edu & 405-325-4779jforman@ou.edu Slides, etc. at www.law.ou.edu/faculty/forman.shtmlwww.law.ou.edu/faculty/forman.shtml 27