Posted by: Chuck Marr
Update, March 4: We’ve just updated our in-depth analysis of recent proposals to strengthen the EITC for childless workers.
Building on calls from both sides of the aisle to expand help to low-income childless workers — the sole group of workers that the federal tax code taxes into (and, in many cases, deeper into) poverty — President Obama’s 2015 budget would strengthen the Earned Income Tax Credit (EITC) for this left-out group.
Next to Social Security, the EITC combined with the refundable portion of the Child Tax Credit constitutes the nation’s most powerful anti-poverty program. These two credits lifted 10.1 million people out of poverty in 2012. The EITC’s most glaring hole, however, is its almost complete exclusion of childless workers (that is, childless adults and non-custodial parents).
The President’s proposal would expand the tiny childless workers’ EITC considerably, raising the maximum credit to about $1,000 from its current $500 (which few childless workers are eligible for) and raising the income limit to qualify for the credit from less than $15,000 to about $18,000 in 2015.
As the graph shows, for example, the credit for a childless adult with wages at the poverty line (projected at $12,566 in 2015) would rise from $171 to $841. For a childless adult working full time at the minimum wage (and earning $14,500), the credit would jump from $22 to $542 in 2015.
The proposal would also allow childless adults aged 21 to 25 to qualify for the EITC. Childless adults under 25 are now ineligible, a serious shortcoming given the importance of young people gaining a toehold in the economy. (It would raise the upper age limit from 65 to 67 as well.)
Expanding the childless workers’ EITC would help a diverse group of low-wage workers, from store clerks to child care workers to truck drivers to home and office cleaners. Just under half are women, and while many are young workers just starting out, we estimate that roughly 35 percent are at least 45 years old.
The benefits of a stronger EITC would go beyond raising their incomes and helping offset their federal taxes. Leading experts from across the political spectrum believe that an expanded credit would help address some of the challenges that less-educated young people (including young African-American men) face, such as low and falling labor-force participation rates, low marriage rates, and high incarceration rates.
The President proposes to offset the $60 billion cost of the proposal over 2015 to 2024 by eliminating tax breaks that allow some high-income people to pay much lower or no taxes on certain kinds of income, including the “carried interest” tax break and the “S corporation” loophole.
The EITC has enjoyed broad bipartisan support over the years because it helps low-income people struggling to make ends meet while encouraging work and personal responsibility. The President’s proposal would make it even better.
CBPP Statement: March 4, 2014
Obama's Budget Seeks Overhaul of Business-Tax Codes
President Barack Obama's budget takes new steps toward overhauling the business tax system, even as it also proposes hundreds of billions of dollars in new taxes on the wealthy and businesses to offset federal spending and trim deficits. Photo: Getty Images.
President Barack Obama 's budget takes new steps toward overhauling the business tax system, and also proposes hundreds of billions of dollars in new taxes on the wealthy and businesses to offset federal spending and trim deficits.
The plan sharpens Mr. Obama's recent focus on revamping the business tax system—an idea he has been advancing since mid-2013. In last year's budget, Mr. Obama laid out a plan to begin the process of rewriting the entire tax system—including businesses and individuals, a goal shared by many Republican lawmakers that proved too ambitious.
Prospects for a rewrite of the business tax system don't appear much better this year, given continued partisan tensions and the looming 2014 campaign season.
But the budget's increased focus on business taxes and infrastructure spending could help build a congressional consensus for using the tax system to help shore up the nation's increasingly shaky system for funding transportation needs.
Businesses are sure to bridle at some of Mr. Obama's ideas, however. For example, the budget proposes more than $100 billion in new taxes on corporations' international operations—bringing the total to $276 billion. Last year's budget sought $157 billion in new taxes on overseas operations.
Mr. Obama's new plan would overhaul the business tax system in a way that would raise significant new revenue to pay for big new investments in infrastructure, such as roads and bridges. In all, Mr. Obama wants to generate $150 billion for infrastructure from changing the corporate tax system.
In his budget message, Mr. Obama repeated his recent call for a business-tax overhaul that would generate one-time revenues that could be used for infrastructure.
"This budget includes that proposal, using the transition revenue that will result from a shift to a simpler, more efficient tax code to create jobs rebuilding our roads and bridges and unclogging our commutes and transporting goods made in America—because in today's global economy, first-class jobs gravitate to first-class infrastructure," he wrote.
A tax-overhaul plan advanced last week by GOP Ways and Means Chairman Dave Camp of Michigan also would set aside about $126 billion from a business-tax overhaul to shore up the transportation funding system. Business reaction has been mixed, particularly from U.S. multinationals that would bear the brunt of the increases.
On Tuesday, a top GOP lawmaker criticized Mr. Obama's proposals. "Instead of promoting pro-growth policies to expand the economy and reduce the deficit, this budget saps American job creators and individuals with more job-killing tax hikes," said Sen. Orrin Hatch (R., Utah), the top Republican on the tax-writing Senate Finance Committee.
In other respects, Mr. Obama's tax proposals also reprise those from past years.
As in the past, Mr. Obama has called for a big reduction in the value of tax deductions and other breaks for higher-income households. Such a move would raise about $600 billion.
In what might amount to a marketing refinement, Mr. Obama's budget renames another proposed tax increase on the wealthy, the so-called Buffett Rule, as the "Fair Share Tax." The tax, which would generate about $53 billion over the next decade, would impose a minimum tax on people making more than $1 million a year.
The White House also wants to raise taxes on large estates.
To help the working poor, Mr. Obama proposes a significant expansion of the Earned Income Tax Credit for workers who don't have children. Currently the EITC provides much bigger benefits for people with children. That would cost about $60 billion over a decade, an amount that would be offset by proposals to close tax "loopholes" enjoyed by the wealthy. Those include ending capital-gains treatment of some compensation received by private-equity fund managers and collecting more in employment taxes on professional-service businesses.
The White House plan also would limit the total accrual of some tax-advantaged retirement benefits, according to budget documents, a change that would generate about $28 billion.
On the corporate side, Mr. Obama sets up a $250 billion fund as part of a "long-run revenue-neutral business tax reform" that would pay for lowering rates on corporations.
Notably, the plan includes a long list of tax increases that Mr. Obama would impose on multinational corporations, including several that are new this year.
The new White House proposals would, for example, tighten rules for digital transactions that some companies design to limit the taxes they pay on certain income. It would also tighten up on use of debt in U.S. operations to generate large deductions and shift profits overseas to countries with lower taxes.
The changes would also make it more difficult for companies to take an unfair advantage of different tax rules in certain countries, where one country might treat a hybrid instrument as debt while another country treats the same instrument as equity.
The budget also seeks to shore up rules against moving company headquarters overseas to reduce U.S. taxation—a gambit that more companies have been trying in the last few years.
In all, the tax increases on the U.S. international tax system would total $276 billion over a decade.
The budget also includes some significant new premium increases for higher-income beneficiaries under Medicare, as well as other charges.
Mr. Obama also drew an explicit connection between raising taxes on the wealthy and businesses while also protecting basic benefits under retirement programs such as Medicare and Social Security—all occurring while trying to make new investments to grow the economy.
"Given the aging of our population and the declining ratio of workers to retirees, we will need additional revenue to maintain our commitments to seniors while also making the investments that are needed to grow our economy and expand opportunity. The budget secures that revenue through tax reform that reduces inefficient and unfair tax breaks and ensures that everyone, from Main Street to Wall Street, is paying their fair share."
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