Census data released today shows that while the national poverty rate remained unchanged in 2011, record numbers of Americans are still living in poverty and median income dropped by 1.5 percent, making income supports for the working poor even more important. Also important in this political year when taxes are a major campaign issue are three basic facts: poor people pay taxes, tax credits are vital in mitigating poverty, and it's not just the middle class and the rich who'll be affected by tax policy changes currently under debate.
1) Poor people pay taxes.
Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. People who shop in stores pay the sales taxes that most state and local governments impose. State and local property taxes affect everyone who owns or rents a home (landlords pass some of the tax on to renters). And of course, most states and many cities levy an income tax.
Among the ways of measuring “how much” taxes any given income group pays, two measures that are often overlooked provide important context: what portion of its income a group spends on all taxes, and whether a group’s share of total taxes paid matches its share of total income. These measures show that the overall U.S. tax system is just barely progressive when you combine all federal, state and local taxes.
Specifically, in combined federal, state and local taxes, the amount each group of American taxpayers spends is as follows (for 2011):
The lowest earning one fifth paid 17.4 percent of their income
The next lowest one fifth paid 21.2 percent of their income
The middle one fifth paid 25.2 percent of their income
The fourth one fifth paid 28.3 percent of their income
The next ten percent paid 29.5 percent of their income
The next five percent paid 30.3 percent of their income
The next four percent paid 30.4 percent of their income
The wealthiest one percent paid 29.0 percent of their income
Total taxes paid by each income group relative to that group’s share of total income is about the same for the very poor and the very rich:
- The share of total taxes paid by the richest one percent in 2011 was 21.6 percent; that group’s share of total income was 21.0 percent.
- The share of total taxes paid by the middle 20 percent in 2011 was 10.3 percent; that group’s share of total income was 11.4 percent.
- The share of total taxes paid by the poorest fifth last year was 2.1 percent; that group’s share of total income was 3.4 percent.
State tax systems are consistently regressive, and the progressive federal income tax plays a mitigating role. Focusing only on federal income taxes paid by different groups distorts and obscures the basic facts of our tax system.
2) As the value of direct government spending on TANF declines, the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) grow in importance.
The EITC was enacted in 1975 to encourage and reward work. It provides a needed earnings boost for growing numbers of under-employed and low wage heads of household. President Ronald Reagan called it “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.” It has long had near universal, bipartisan support and has been expanded under Presidents Reagan, Clinton, Bush, and Obama. The Child Tax Credit was introduced in 1997 to help working families offset the cost of raising their children and has also been expanded with bipartisan support.
Today, the federal revenue spent on these two tax credits is comparable to, and in some cases greater than, revenue spent on other types of programs that lift families out of poverty or keep them from falling into poverty.
Billions of Federal Dollars Spent on Income Support Programs in 2011:
Unemployment compensation - $117.2
Food and nutrition assistance - $95.7
Earned Income Tax Credit - $55.7
Supplemental Security Income - $49.6
Family & Other Support Assistance (incl.TANF) - $26.4
Child Tax Credit (refundable portion) - $22.7
The EITC is a tax credit equal to a percentage of earnings from work up to a certain limit. The percentage varies based on how many children the family has. In 2012:
- A family with one child receives a credit equal to 34 percent of earnings, up to a maximum credit of $3,169.
- A family with two children receives a credit equal to 40 percent of earnings, up to a maximum credit of $5,236.
- A family with three or more children receives a credit equal to 45 percent of earnings, up to a maximum credit of $5,891.
(For childless workers, the maximum EITC in 2012 is just $475.)
As a family’s income rises, the EITC is phased out. The credit is reduced by a fixed percentage for each dollar exceeding a relatively low level ($22,300 for married families with children and $17,090 for unmarried families with children in 2012).
One of the EITC’s most effective features is that it is refundable. A family can receive the full benefit of the credit in the form of a refund, even if it exceeds their income tax liability, so the EITC can function to offset other kinds of taxes, including those that fall most heavily on low income families, beyond the income tax (particularly consumption taxes).
The Child Tax Credit (CTC) is available to families earning $3,000 a year or more. It is equal to a maximum of $1,000 per child and largely benefits middle-income taxpayers, but the refundable portion of the CTC does benefit low-income families. The refundable portion of the credit equals 15 percent of earnings above a specific threshold, or $1,000 per child, whichever is less.
It is important to note, of course, that while these expenditures help low income households, middle and upper-income households benefit the most from tax expenditures such as the home mortgage interest deduction and the special low rate on capital gains.
3) The EITC and CTC benefits for 13 million families with 26 million children are at stake in current tax cut debates.
The EITC and the CTC were expanded as part of the 2001 Bush tax cuts and again under the American Recovery and Reinvestment Act of 2009; all of these provisions were then extended through 2012, (under the 2010 agreement to extend the Bush tax cuts for two years). The outcome of debates over the fate of the Bush tax cuts, in Congress and among candidates for federal office, affect these anti-poverty credits.
If only the Bush era provisions of these tax credits are preserved (as per a House bill passed this year):
- The EITC would cease to provide a higher percentage for families with three or more children;
- The EITC would begin to phase out at an income level $2,000 lower for married couples;
- Fewer families would be eligible for the CTC since eligibility would begin at $13,300 rather than $3,000 in annual income.
Preserving the 2009 EITC provisions (as per a Senate bill passed this year):
- Would save 6.5 million working families, with 15.9 million children, a total of $3.4 billion, an average of $530 per family.
Preserving the 2009 changes to the CTC:
- Would save 8.9 million working families, with 16.4 million eligible children a total of $7.6 billion; an average of $854 per family.
In combination, preserving both of these 2009 provisions would save 13.1 million working families, with 25.7 million children, a total of $11.1 billion, an average of $843 per family.*
* The total number of families and children affected by the CTC expansion and the EITC expansion is less than the sum of the number affected by each of them because 18 percent of families that benefit would benefit from both.
Section 1) Citizens for Tax Justice, “Who Pays Taxes in America,” April 4, 2012, http://www.ctj.org/pdf/taxday2012.pdf
Section 2) IRS, Internal Revenue Bulletin 2011-45, November 7, 2011, http://www.irs.gov/irb/2011-45_IRB/ar13.html#d0e1033, and FY 2013 Historical Tables, Budget of the U.S. Government, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf.Section 3) Citizens for Tax Justice, “The Debate over Tax Cuts: It’s Not Just About the Rich,” July 19, 2012, http://ctj.org/pdf/refundablecredits2012.pdfSections 1 and 2 use figures from the Institute on Taxation and Economic Policy’s Microsimulation Tax Model, http://www.itep.org/about/itep_tax_model_simple.php.