1. Using Refundable Tax Credits to Help Low- income Taxpayers by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma & ATAX Fellow, UNSW University of Melbourne Melbourne, Australia August 16, 2011

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3. 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 3

4. Rising Inequality 4

5. 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 5

6. 6 U.S. Average Annual Earnings of Full-time Workers, 2008 Doctors (Family & GP)$161,490 Lawyers 124,750 Economists 90,830 Nurses (RN) 65,130 Police 52,810 Auto mechanics 38,967 Secretaries 29,990 Garbage collectors 37,540 Orderlies 24,620 Waiters and waitresses 19,580

7. 7 Distribution of Earnings, 2004

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11. 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 11 http://dx.doi.org/10.1787/422058728151

12. U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2011 Unmarried individuals Heads of household with one child Married couples filing joint returns with two children Standard deduction$5,800$ 8,500$11,600 Personal exemptions$3,700$ 7,400$14,800 Simple income tax threshold $9,500$15,900$26,400 12 Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.http://www.irs.gov/pub/irs-irbs/irb11-02.pdf

13. Tax Rate Schedules for Various Taxpayers, 2011 13 Tax rate Rate bracket Unmarried individuals Heads of household with one child Married couples filing joint returns with two children 10$0 to $8,500$0 to $12,150$0 to $17,000 15$8,500 to $34,500$12,150 to $46,250$17,000 to $69,000 25$34,500 to $83,600$46,250 to $119,400$69,000 to $139,350 28$83,600 to $174,400$119,400 to $193,350$139,350 to $212,300 33$174,400 to $379,150$193,350 to $379,150$212,300 to $379,150 35Over $379,150 Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.http://www.irs.gov/pub/irs-irbs/irb11-02.pdf

14. 14 Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.http://finance.senate.gov/imo/media/doc/120210DEtest.pdf

15. 15 Center on Budget and Policy Priorities, Top Ten Tax Charts (April 14, 2011), http://www.offthechartsblog.org /top-ten-tax-charts/. http://www.offthechartsblog.org /top-ten-tax-charts/

16. 16 20 Facts About U.S. Inequality that Everyone Should Know, http://stanford.edu/group/scspi/cgi-bin/facts.php. http://stanford.edu/group/scspi/cgi-bin/facts.php Productivity and Real Income

17. Rising Poverty 17 U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), http://www.census.gov.http://www.census.gov

18. Earned Income Tax Credit (EITC) Increase  Relatively new credit percentage for 3 or more qualifying children I.R.C. § 32 Temporary increase 2009-2010, extended 2011-2012 45% of earnings (up from 40%)  Maximum credit increased to $5,751 in 2011  Maximum AGI increased to $49,078 in 2011 18 Rev. Proc. 2011-12, 2011-2 IRB 297, http://www.irs.gov/pub/irs-irbs/irb11-02.pdf.http://www.irs.gov/pub/irs-irbs/irb11-02.pdf

19. Child Tax Credit  $1,000 per qualifying child I.R.C. § 24  Temporary expansion of eligibility for refundable credit (15% × earned income minus $3,000 threshold)  More lower income families qualify: 2008 – threshold amount was = $8,500 2009-2012 – threshold amount = $3,000 19

20. 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 20

21. Taxes at Poverty Level, 2010 21 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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26. Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) 26 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

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28. Canada 2010  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 28

29. 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 29

30. United Kingdom 2010  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 30

31. Australia 2010  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 31

32. Australia 2011: Add a Carbon Tax, but:  Triple the tax-free threshold to $18,200 Which will replace all but $445 of the low-income tax offset (LITO) Improve work incentives @ low incomes Remove one million taxpayers  Increase Government payments Pensions, allowances and Family Tax Benefit 32 http://www.cleanenergyfuture.gov.au/wp-content/uploads/2011/07/securing-a-clean-energy- future-summary.pdf

33. Securing a Clean Energy Future 33 http://www.cleanenergyfuture.gov.au/wp-content/uploads/2011/07/securing-a-clean-energy- future-summary.pdf

34. 34 http://www.futuretax.gov.au/content/TaxForum/discussion_paper/tax_forum_next_steps_for_Austr alia_20110729.pdf

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40. 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) 40 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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42. About the Author  Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law and the author of Making America Work (Washington, DC: Urban Institute Press, 2006).  Jon was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year.  Jon can be reached at jforman@ou.edu, +1-405-325- 4779, www.law.ou.edu/faculty/forman.shtml.jforman@ou.eduwww.law.ou.edu/faculty/forman.shtml 42