June 5, 2003 | WebMemo on Taxes
Recent media attention has left the impression that H.R. 2 - the new tax bill President Bush signed into law -- does not give a tax cut to many families because of a provision of the child tax credit. Tax cut critics have stepped up their attacks on the law and, ironically, are calling for more tax "cuts."
Usually buried in these stories, if mentioned at all, is that this controversy involves sending larger checks to families who already pay no federal income taxes and receive a check from the government. These families did not receive an income tax cut, because they did not pay any income tax. Furthermore, most of the media coverage ignores that the President's 2001 tax law benefited many taxpayers in the lower income groups.
Non-taxpayers Get Taxpayer Dollars
In fact, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) offered broad based tax relief only in that it phased in tax relief for most middle and upper income tax filers over the period 2004 through 2010. A list of EGTRRA provisions that took effect prior to 2003 is as follows:
Interestingly, most of the recent clamor has been over the child tax credit. As mentioned above, EGTRRA increased the child tax credit to $600 per child, and expanded the "refundable" portion of the credit to families with less than three children. The amount of this "refund" was set at 10 percent of a filer's "earned income" in excess of $10,000 for the years 2001 through 2004, and, and increased to 15 percent beginning in 2005.
What does all this mean? It means that there is a limit to the amount of the "refundable" child tax credit. To reach this limit, however, tax liability must be zero. An example of this scenario is explained nicely with the following example from the Center on Budget and Policy Priorities:
Since the new tax law did not accelerate the refundable provision of the child credit, families such as those in the above example will not receive an additional check from the federal government - but they will still pay no federal income taxes and receive a check.
Transfer of Wealth
In response, Senator Charles Grassley (R-Iowa) and Representative Charles Rangel (D-NY), among others, introduced bills to accelerate the expansion of the "refundable" portion of the child tax credit. Despite its name, the refundable portion of the child tax credit is not a refund at all - only those with no tax liability receive the check. We oppose any legislation that increases the so-called refundable portion of the child tax credit.
Good tax policy dictates that people be allowed to keep more of their own money, it has nothing to do with outright transfers of wealth. It is shameful that members of Congress who labeled the actual tax cuts in H.R.2 as "costing too much" now want to provide non-taxpayers with taxpayer dollars. Perhaps these members are against tax cuts because they want to give those tax dollars to people who don't pay taxes?
Andrew Lee and Robert Greenstein, "How The New Tax Law Alters The Child Tax Credit and How Low-income Families Are Affected," The Center on Budget and Policy Priorities, May 28, 2003, at http://www.cbpp.org/5-28-03tax3.htm.