The Welfare-Expanding Tax Reform Bill
Although there are some good things in the Republicans’ tax-reform bill that President trump signed into law before Christmas (H.R.1, PL 115-97), the continuance and expansion of welfare is certainly not one of them. The tax bill cuts taxes, yes; but it also increases welfare spending.
But first of all, how is it that a tax bill can contain provisions for welfare? In three words: refundable tax credits.
A regular tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Like tax deductions and exemptions, one will pay less in taxes the greater the number, and the greater the amount, of tax credits that one qualifies for. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. Tax credits, like their cousins tax deductions and exemptions, are always a good thing, except when they are refundable.
A refundable tax credit is treated as a payment from the taxpayer like federal income tax withheld or estimated tax payments. If the tax credit “payment” is more than the tax owed after the regular tax credits are applied, then the taxpayer receives a refund of the money he never actually paid in. The money is simply taken from real taxpayers and transferred to him. Refundable tax credits are the ultimate form of welfare because they are payments made in cash like the Temporary Assistance to Needy Families (TANF) or Supplemental Security Income (SSI) programs instead of payments made to a third party, like Medicaid, or deposited on an Electronic Benefit Card (EBC), as in SNAP (food stamps).
Under current tax law (tax year 2017), there are three refundable tax credits: the American Opportunity Tax Credit (AOTC), the Additional Child Tax Credit (ACTC), and the Earned Income Tax Credit (EITC).
The AOTC is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student in each of the first four years of the student’s post-secondary education in a degree or certificate program. The maximum credit is therefore $2,500. No credit can be claimed if the taxpayer’s modified adjusted gross income exceeds $90,000 ($180,000 for joint filers). There is a phase-out for taxpayers with modified adjusted gross incomes over $80,000 ($160,000 for joint filers). Forty percent (up to $1,000 per student) of the AOTC is refundable.
The ACTC is available to taxpayers with a qualifying child who receive less than the full amount of the $1,000 Child Tax Credit (CTC) because the tax owed is less than the allowable child tax credit. In that case, the amount of the ACTC, for taxpayers with one or two children, is the smaller of the remaining child tax credit or 15 percent of the taxpayer’s taxable earned income over $3,000. For taxpayers with three or more children, the amount of the ACTC is the smaller of the unused portion or the larger of either 15 percent of the taxpayer’s taxable earned income over $3,000 or the sum of Social Security and Medicare taxes paid minus the earned income credit.
The EITC is a fully refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The actual amount of EITC benefit depends on a recipient’s income and number of children. To be eligible, both earned income and adjusted gross income must each be less than:
- $15,010 ($20,600 married filing jointly) with no qualifying children
- $39,617 ($45,207 married filing jointly) with one qualifying child
- $45,007 ($50,597 married filing jointly) with two qualifying children
- $48,340 ($53,930 married filing jointly) with three or more qualifying children
The maximum EITC that one can receive is:
- $510 with no qualifying children
- $3,400 with one qualifying child
- $5,616 with two qualifying children
- $6,318 with three or more qualifying children
To receive the maximum credit, one’s income must be between:
- $6,670 and $8,340 ($13,930 married filing jointly) with no qualifying children
- $10,000 and $18,340 ($23,930 married filing jointly) with one qualifying child
- $14,040 and $18,340 ($23,930 married filing jointly) with two or more qualifying children
The EITC is the largest federal cash transfer program. Almost 90 percent of its benefits are paid out in cash.
Americans who receive refundable tax credits get another added benefit as well. Any cash payment they receive is not counted as income when determining their eligibility for benefits or assistance, or how much they can receive, from any federal welfare program or any state or local program financed in whole or in part with federal funds.
In the GOP’s welfare-expanding, tax-reform bill, which takes effect for tax year 2018, the AOTC is unchanged, EITC benefits are slightly increased, and the ACTC is merged into the regular CTC and greatly expanded.
EITC benefits are adjusted every year for inflation. The new maximums are $520, $3,468, $5,728, and $6,444. The income levels have also increased.
The CTC is increased to $2,000 per qualifying child. Of this amount, $1,400 is refundable. For those taxpayers making over $200,000 ($400,000 married filing jointly), the credit begins to phase out. Taxpayers making over $240,000 ($440,000 married filing jointly) are not eligible for the credit.
Instead of eliminating refundable tax credits, Republicans eliminated or limited many tax deductions and exemptions in order to “pay for” lower tax rates for individuals and corporations Shame on them for being welfare statists.
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