How do you offer a significant tax cut to those who pay no federal income taxes? That is a question that seems to be vexing Sen. Marco Rubio to the point that he is willing to hold up a bill that already doubles the child tax credit. But it is the wrong question to be asking.
The question we should be asking is how we can have less socialism, not more wealth redistribution, so that the economy can grow and everyone can enjoy upward mobility through better jobs, higher wages, and cheaper goods and services.
The reality is that for most families earning below the level of income tax liability, the best policies for them in the long run are rooted in capitalism, not the Robin Hood model. Just ask Walmart and Amazon. The more government regulation, distortion, and interference are pushed aside, the cheaper the product or service is. Remember, while lower-income families have no income tax liability, they pay the stealth tax of regulations worth almost $15,000 a year per family.
If we cut taxes for all those who pay them, reducing the business tax, and most importantly cutting regulations and market distortions, lower-income families will become middle-income families, which is a much better offer than taking an extra $500-$1000 from other people and redistributing it to them.
We either believe in socialism or we don’t. Sadly, Marco Rubio appears to subscribe to Bernie Sanders’ emails:
20.94% Corp. rate to pay for tax cut for working family making $40k was anti-growth but 21% to cut tax for couples making $1million is fine?— Marco Rubio (@marcorubio) December 12, 2017
Tax negotiators didn’t have much trouble finding a way to lower the the top tax bracket and to start the corporate tax cut a year early. 1/2— Marco Rubio (@marcorubio) December 14, 2017
The junior senator from Florida appears to be making the Bernie Sanders argument that a tax cut is a handout and a handout is a tax cut. It’s as if a restaurant owner made one person pay $100 for the meal and another person $0. One day, he offers a 10 percent discount to those who paid, and a spectator sanctimoniously complains, “And you are offering nothing for the working guy?”
The highly progressive tax code is even more pro-family and progressive under this bill
Our current tax system offers a reduced tax burden for those with children. Every family gets a personal exemption and a $1,000 credit per child. That credit is refundable, so even if a family doesn’t pay taxes, they get cash “back” at tax time. The current iteration of the tax bill doubles the child tax credit. This should be hailed as pro-family by everyone.
Except it’s not enough for Sens. Marco Rubio and Mike Lee, who are complaining that the extra $1,000 expansion is not also made refundable for those who already don’t pay taxes. Their original plan called for a $2,500 child tax credit, all of which was refundable. This makes no sense from any standpoint, much less a conservative one.
To begin with, this bill already stacks the deck against those with no dependent children. And remember, these are not just liberals who don’t want to have children but empty-nesters who no longer have dependent children.
As I noted in my analysis of the bill, because the plan eliminates the personal exemption but doubles the child tax credit (CTC), only those with dependent children get a substantial benefit. For many with higher itemized deductions, the elimination of the personal exemption is really going to mute the benefit of the rate cuts. For me, almost the entirety of my tax cut will come from the fact that I have three dependent children.
Therefore, for Rubio to suggest that the expanded portion of the CTC must also be refundable, and that barring such an addition, the bill is not pro-family enough, is simply bizarre.
But the broader problem is that the difference between what this bill currently does and what Rubio is demanding is the difference between offering a substantial tax break for those with dependent children vs. downright paying people to have children. I support the goal of this bill, but not the idea expand the number of those paying absolutely no income taxes and growing what amounts to outright welfare through the tax code.
A family of four earning below the income level that would make them pay income taxes, a group Rubio is very focused on, is already not paying income taxes and is already getting health care paid for under Obamacare, while those above the subsidy line are getting hit with insurance premiums higher than a mortgage and utilities.
We need to broaden, not shrink, the tax base
Rubio and supporters of his proposal counter that these families still pay payroll taxes (for Social Security and Medicare). There are two main problems with this argument:
- Social Security is not supposed to be based on the participant's means. Everybody who expects to participate in benefits is supposed to pay in to the system. It would make absolutely no sense for a family to pay no income tax and nothing in to Social Security, while reaping every last least benefit from that and many other programs. That is pure wealth distribution, aka pure socialism.
- Many of these families already pay little or no payroll taxes, either. Rubio and others are ignoring the fact that in addition to the refundable portion of the existing child tax credit, there is the Earned Income Tax Credit (EITC), a refundable credit designed to cut down or eliminate payroll tax liability. For tax year 2017, the EITC, which has become more weighted towards low-income filers with children since the ’90s, was up to $6,318 for married couples with three or more qualifying children, $5,616 with two qualifying children, and $3,400 with one qualifying child. According to the Tax Foundation, as of 2010, 23.1 million tax returns, which is about 81 percent of those taking the EITC, mainly low-income families with dependent children, had enough refundable tax credits to zero out even their payroll tax liability, if not more.
It's simply unfair to say we don’t spend enough on refundable tax credits for those with children who already don’t pay income taxes. The refundable tax credits have grown enormously since the 1970s and now cost close to $100 billion, more than the entire food stamp program.
Where is this money coming from? From those who pay a substantial amount in taxes and from corporations (aka jobs and products for everyone) — people who Rubio thinks should pay more in taxes.
The reality is that it’s the existing refundable tax credits under current law, mixed with the Reagan and Bush tax cuts (which eliminated the bottom income brackets) that are responsible for making the code more progressive and growing the percentage of people who don’t pay taxes.
In 1979, just 22.6 percent had zero income tax liability. In 2001, prior to the Bush tax cuts, that number was still as low as 27 percent. In 1980, the top 1 percent paid roughly 19 percent of all income taxes. Now they pay almost 40 percent.
Under the new tax bill, between the doubling of the standard deduction and the doubling of the child tax credit, many more people with dependent children who currently owe a few thousand in taxes would have zero tax liability. And by extension, more of their existing refundable credits could be used to zero out their payroll tax liability. According to the Washington Post, 47.5 percent of all tax filers, almost half, would pay zero in income taxes under the House bill, which was less generous than the final bill.
The U.S. tax code, contrary to popular belief, is already possibly the most progressive in the western world. Although most European countries have higher overall marginal tax rates, they are spread out over more of the people, and everyone pays consumption-based taxes. America’s overall tax burden is better, but the burden that exists is almost exclusively shouldered by the wealthy.
To hijack this bill and paint it as not pro-family enough while demanding that all of the new expansion be refundable is simply indefensible — unless one subscribes to Bernie Sanders’ view of Robin Hood.
If Rubio wanted to adopt a plan similar to the Cruz and Paul presidential campaign plans, merging the payroll and income taxes into one with a low flat tax, then I’d be all for officially breaking the connection between payroll taxes and Social Security. But that is far from what he wants. To create an even larger portion of the country that pays no income taxes makes no sense and is certainly not conservative.
The childless western culture is not a tax problem; it’s a values/marriage problem
Sens. Rubio and Lee are correct in their broad philosophical argument that families who raise children bear a greater cost and potentially produce the next generation of taxpayers. And I’d be the first one to sign on to their proposal for refundable child tax credits if we were to abolish the welfare state, abolish the rest of the progressive tax code, and end all government interference in health care, education, and other products and services. In a true free market republic, having more kids would, by definition, produce more net givers.
But under our system, growing refundable tax credits on top of the welfare state will actually incentivize more dependency and subsidize more poverty rather than upward mobility. It’s a joke for Rubio to say he wants to expand the CTC to encourage families to have children to grow the population and thereby the tax base … among families too poor to be required to pay taxes.
We must recognize that although financial considerations are a factor when deciding whether to have children, the main culprit for the alarmingly declining birth rates in western countries is a cultural and values problem. We need to make marriage and family values great again, not Bernie Sanders-style socialism.
And to his credit, Senator Lee has addressed this issue throughout his tenure regarding work and welfare, independent from his refundable tax credit plan.
There's no empirical evidence that the plan would actually lead to the production of future taxpayers. Most of the tax credits would go to parents who've already borne children and have no interest in bearing more. Furthermore, to the degree that the credit incentivizes more childbearing, it may increase out-of-wedlock births. Numerous studies indicate that children born out of wedlock have a far higher risk of living their lives in poverty: net recipients, not financiers, of the entitlement state.
The bottom line is that the best thing we can do for the country’s replacement rate is to fix the culture and encourage marriage again. And the best thing we can do for lower-income families is to increase their opportunities for higher income and a lower cost of living. That will certainly not happen by exacerbating current failed progressive social experiments, redistributing wealth, and subsidizing poverty.
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