SOCIAL SECURITY: How It Works and How to Fix It

SOCIAL SECURITY: How It Works and How to Fix It

Using Refundable Tax Credits to Help Lowincome 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 Income Inequality Australia Canada Mexico Sweden United Kingdom United States OECD-30 Gini coefficient Level Rank 0.30 16 0.32 18 0.47 30 0.23 2

Interdecile ratio P90/P10 Level Rank 3.95 15 4.12 17 8.53 30 2.79 2 Interdecile ratio P50/P10 Level Rank 2.09 18 2.14 20 2.86 30 1.72 1 0.34 0.38 0.31 4.21 5.91 4.16

1.99 2.69 2.09 http://dx.doi.org/10.1787/420888675468 23 27 .. 18 27 15 29 .. 2 Income Inequality, cont. Australia Canada Mexico Sweden United Kingdom United States OECD-30 Interquintile share ratio (S80/S20)

4.8 5.2 12.1 3.3 Interdecile ratio (P90/P10) 4.0 4.1 8.5 2.8 5.4 7.9 5.3 4.2 5.9 4.1 http://dx.doi.org/10.1787/421061637532 3 Inequality and Redistribution Country Australia Canada Mexico Sweden

United Kingdom United States OECD Gini Gini Before After 0.46 0.3 0.44 0.32 n/ a 0.47 0.43 0.23 0.46 0.46 0.45 0.34 0.38 0.31 Poverty Before (50% of median income) 28.6

23.1 Poverty After (50% of Tax Social median % Spending income) GDP %GDP 12.4 30.6 17.1 12.0 33.3 16.5 21.0 26.7 18.4 5.3 20.6 49.1 7.0 29.4 26.3 26.3 26.4

8.3 17.1 10.6 37.1 28.0 35.9 21.3 15.9 20.5 4 Inequality & Child Poverty in Selected Countries 5 Social Spending & Child Poverty in Selected Countries 6 Redistribution through Cash Transfers & Taxes Australia Canada Korea Sweden United

Kingdom United States OECD-23 Transfers Taxes from Net transfers to lowest to lowest lowest quintile quintile quintile 5.9 0.2 5.8 3.5 0.6 2.9 0.9 0.5 0.4 8.5 2.8 5.7 4.6 2.3 5.4 http://dx.doi.org/10.1787/422058728151 0.4 0.4 1.2

4.1 1.9 4.2 7 Tax-to-GDP Ratios, 2007 Income Country Taxes Australia 18.4 Canada 16.6 United Kingdom 14.3 United States 13.9 OECD Total 13.2 Payroll Consumption Total taxes Taxes Taxes 8.2 30.8 4.8 7.9 33.3 6.6 10.5 36.1

6.6 4.7 28.3 9.1 10.9 35.8 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 . 8 U.S. Standard Deductions, Personal Exemptions, and Simple Income Tax Thresholds, 2010 Standard deduction Unmarried individuals $5,700 Married Heads of couples filing household joint returns with one with two child children $ 8,400

$11,400 Personal exemptions $3,650 $ 7,300 $14,600 Simple income tax threshold $9,350 $15,700 $26,000 9 Tax Rate Schedules for Various Taxpayers, 2010 Tax rate 10 15 25 28 33

35 Rate bracket Unmarried individuals $0 to $8,375 $8,375 to $34,000 $34,000 to $82,400 $82,400 to $171,850 $171,850 to $373,650 Over $373,650 Heads of household with one child $0 to $11,950 $11,950 to $45,550 $45,550 to $117,650 $117,650 to $190,550 $190,550 to $33,650 Over $373,650 Married couples filing joint returns with two children $0 to $16,750 $16,750 to $68,000 $68,000 to $137,300 $137,300 to $209,250 $209,250 to $373,650 Over $373,650

10 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 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 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 Poverty Levels & Net Federal Tax Thresholds, 2010 1. Poverty levels 2. Simple income tax threshold (before credits) 3. Income tax threshold after credits 4. Employee payroll tax threshold 5. Combined income & payroll tax threshold Unmarried Single

Married Married individual parent w/ 1 couple w/ couple w/ child 2 children 3 children $10,830 $14,570 $22,050 $25,790 $9,350 $15,700 $26,000 $29,650 $13,395 $32,380 $50,250 $60,567 $0 $0 $0 $0 $9,348

$25,717 $38,635 $43,788 14 Taxes at Poverty Level, 2010 Unmarried individual 1. Poverty levels 2. Income tax at poverty level (after credits) 3. Employee Social Security & Medicare tax at poverty level 4. Combined income & payroll tax at poverty level 5. Combined tax as a % of income at poverty level Single Married Married parent w/ couple w/ couple w/ 1 child 2 children 3 children $10,830

$14,570 $22,050 $25,790 -$453 -$4,450 -$7,712 -$8,554 $829 $1,115 $1,687 $1,973 $376 -$3,335 -$6,025 -$6,581 3.5% -22.9% -27.3% -25.5% 15

16 Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) Social Security Medicare Medicaid Unemployment compensation Supplemental Security Income Earned income tax credit Child tax credit Making work pay tax credit Food assistance Family support Housing assistance General retirement and disability Federal employee retirement and disability Veterans benefits and services 2009 actual $678 425 251 119 41 42 24 <1 72

26 10 8 118 49 2015 estimate $893 651 336 65 52 45 26 n/a 89 25 5 10 141 84 17 U.S.: Share of Household Income & Gini Index, 2005 Quintiles Lowest Second Middle Fourth Highest

Gini Index Market income Disposable income 1.50 7.26 14.00 23.41 53.83 0.493 4.42 9.86 15.33 23.11 47.28 0.418 18 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 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 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

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 Percent Average Cumulative Tax Rates Confronting Low-toModerate-Income Families ($10k - $40k) 100% 80% 60% 40% 20% 0% 35.9% Tax 58.8% Plus Food Stamps & Health

88.6% Plus TANF, Housing, Child Care Source: Adam Carasso & C. Eugene Steuerle, The True Tax Rates Confronting Families with Children, Tax Notes 253 (October 10, 2005). 23 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) Pre-transfer earnings 0 $10,000 $20,000 $50,000 $100,000 $200,000 Plus personal tax credits $6,000 $6,000 $6,000 $6,000 $6,000

$6,000 Plus worker credit Less tax imposed After-tax income 0 $2,000 $2,000 $2,000 $2,000 $2,000 0 $2,000 $4,000 $10,000 $27,500 $62,500 $6,000 $16,000 $24,000 $48,000 $80,500 $145,500

24 How an Integrated Tax and Transfer System Would Affect a Single Parent with Two Children ($2,000 Universal Grants, $2,000 per Worker Credits, and 20 and 35 Percent Tax Rates) Post-tax, post-transfer income $100,000 $75,000 $50,000 Pre-transfer earnings $25,000 Post-tax, post transfer income $0 $0 $25,000 $50,000 $75,000 $100,000 Pre-transfer earnings 25 $2,000 per Worker Earned Income Credit,

with or without a Phase-out (Credit = 20% 1st $10,000 of earnings) Credit Amount t $5,000 $4,000 $3,000 $2,000 $1,000 $0 $0 $20,000 $40,000 $60,000 $80,000 Earned income $2,000 per worker credit $2,000 per worker credit with phase-out 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 masters degrees in both economics and psychology. Jon can be reached at [email protected] & 405-325-4779 Slides, etc. at www.law.ou.edu/faculty/forman.shtml 27

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