Revised September 13, 1996
by Kathryn Larin and Robert Greenstein
An analysis based on data from the Congressional Budget Office shows that under the child tax credit in the Dole tax proposal, 28 million children or two of every five would receive no child tax credit because their incomes are not high enough to make them eligible. The Dole proposal denies the credit to four million children from lower-middle-class working families that would have qualified for the version of the child credit Congress approved last year.
The analysis finds that virtually all families with incomes under $20,000 and large numbers of families in the $20,000 to $30,000 range would fail to qualify for the Dole version of the child tax credit.
The families not eligible for the credit include many working families with incomes well above the
poverty line. About half of all children made ineligible for the credit would be children in families
above the poverty line, primarily children in lower-middle class families, while about half would be
children living in poverty.
How this Analysis Was Conducted
2 David Rosenbaum, "With Skepticism and Tax Cuts for All," The New York Times, July 2, 1995.
An additional six percent of children in lower-middle class families would qualify for only a partial credit that is, a credit less than $500 per child. As a result, a total of 46 percent of all children nearly half would receive no credit or only a partial credit because their family's incomes are not high enough.
That nearly half of all children would not receive the credit or would get only a partial credit including many lower-middle class children, as well as children in working poor families has not been made clear in recent statements by the proposal's supporters. In his speech in San Diego during the Republican convention, Mr. Dole referred to the proposal as "a $500 per child tax credit for low- and middle-income families in America."
Under the Dole plan, a family could receive the child tax credit only if the federal income tax it owes exceeds the earned income tax credit it receives. (The EITC is a refundable tax credit primarily for low- and moderate-income working families with children.) By contrast, under the child credit that Congress passed last year, a family could receive the child credit if it owes federal income tax before the earned income credit is taken into account.
For example, under the Dole proposal, a family that pays $800 in federal income tax and receives a $900 EITC would not be eligible for the child credit. Under last year's Congressional proposal, such a family would have qualified.
Proponents of the Dole proposal may contend that families should not receive a child credit if their income tax liability is canceled out by the earned income credit. These families, however, pay large amounts of other federal taxes, especially payroll taxes. Joint Tax Committee data issued last year show that families with incomes below $20,000, virtually none of whom would qualify for the Dole child tax, will pay $241 billion in federal taxes between 1996 and 2000. Families below $30,000 will owe $644 billion in federal taxes during this period, with 90 percent of these tax payments coming from taxes other than the federal income tax, primarily the payroll tax.
Under the original child tax credit featured in the Contract with America, many low-income working families that have no income tax liability but owe large amounts of payroll tax would have qualified for the child credit. Under the Contract, the child credit would have offset a portion of a family's payroll tax. To free up money for other tax cuts, however, the House of Representatives scaled back the child tax credit in early 1995 by eliminating the credit for working families that earn too little to owe income tax but have large payroll tax obligations. The Dole proposal further scales back the credit, making a still larger number of working families ineligible for it.
Millions of Families Would Face a Tax Increase
The overall Dole budget proposal of which the child tax credit is a part includes the budget cuts
contained in the Congressional budget resolution that Congress approved this spring. The budget
resolution assumes $18.5 billion in reductions over the next six years in the earned income tax
credit for low- and moderate-income working families. As a result, under the Dole plan, millions of
families would face a cut in one child-oriented tax credit the EITC while being denied the
new child tax credit.
CHILDREN AND THE CLINTON CHILD TAX CREDIT
Large numbers of low- and moderate-income children also would fail to qualify for the Clinton child tax credit
because their incomes are not high enough. To receive the child credit under the Clinton plan, a family must owe
federal income tax before the earned income credit is taken into account. (As noted in the text, to receive the
child credit under the Dole plan, a family must have income tax liability remaining after the EITC is subtracted.
The child credit would not be refundable under either version.)
Many of these families also would benefit little, if at all, from the proposed 15 percent across-the-board reduction in income tax rates, since they owe little or no income tax. 3 Those families that would lose more from the EITC cuts than they would gain from the child credit and the income tax rate reduction would be worse off. Most of these families would owe more in total tax to the federal government when income and payroll taxes, the EITC, and the new child tax credit are all considered. In other words, they would face a tax increase.4
An analysis by Citizens for Tax Justice, using a sophisticated computer model similar to those used
by the Treasury Department and the Joint Committee on Taxation, finds that nearly five million
working families with children would be in this situation that is, they would be worse off overall.6
Most of these families would owe more in combined income and payroll taxes and thus would face
a tax increase.7 (Four million poor workers without qualifying children also would face tax
increases, since the Congressional budget resolution calls for eliminating their eligibility for the
earned income tax credit entirely. Overall, the Citizens for Tax Justice analysis indicates that 8.9
million low-income working households including both those with children and those without
children would be made worse off.)
The income ranges in which families would be net losers as a result of the EITC changes, the child credit, and the 15 percent rate reduction in the Dole plan are shown below. (The accompanying Center analysis, "Additional Information on the Proposed Child Tax Credit," provides more information on this issue.)
|Type of Family||Income Range in Which Family Loses 8|
|Families with two children.|
|Two-parent families of four; no child care costs.|
$17, 040 - $23, 690
|Same family but with $200 a month in child care costs.|
$17,040 - $25,155
|Same family but with $400 a month in child care costs.|
$17,040 - $26,485
|Families with three children.|
|Two-parent family with three children; no child care costs.|
$17,040 - $24,750
|Same family but with $200 a month in child care costs.|
$17,040 - $24,150
|Same family but with $400 a month in child care costs.|
$17,040 - $27,505
Far More Low- and Moderate-Income Children than
High-Income Children Denied the Credit
Although 40 percent of children would be denied the child tax credit because their incomes are not
high enough, only a very small percentage of children would be denied the credit because their
incomes are too high.
The proposed child credit is sometimes described as being unavailable to single-parent families with incomes above $75,000 and married families with incomes above $110,000. That is not correct. Many families at higher income levels would qualify as well.
The $75,000 and $110,000 thresholds are the levels above which the full $500-per-child credit begins to phase down, not the levels above which families no longer qualify for the credit. Since the credit would phase down slowly, a married couple with children would qualify for a partial child credit until its income reaches about $150,000. Families with incomes below that level would be ineligible only if they take so many tax deductions, credits, and other write-offs that they pay the alternative minimum tax.
As a result, only about five percent of children would be ineligible for the credit because their family's income is too high.9 This contrasts with the 40 percent of children who would be ineligible because their family's incomes are too low.
Moreover, high-income families that would not qualify for the credit because their income exceeds $150,000 a year would nevertheless receive very large tax cuts. Large numbers of these families would benefit from the large capital gains tax cut in the Dole plan and the proposed extension to high-income individuals of tax breaks for deposits made in Individual Retirement Accounts. These families also would gain handsomely from the 15 percent income tax rate cut. While being ineligible for the child tax credit, these high-income families would, on average, receive much larger overall tax cuts than families at any other income level.
1. All figures in this analysis are in 1996 dollars.
2. David Rosenbaum, "With Skepticism and Tax Cuts For All," The New York Times, July 2, 1995.
3. In addition, only a tiny fraction of these families would derive any benefit from the proposed capital gains tax cut. IRS data show that fewer than three percent of tax filers with incomes below $30,000 report any capital gains income.
4. We are distinguishing here between families that would have a smaller negative tax liability (i.e., would get back less from the government when the combined effect of the EITC, income tax, and payroll tax are considered) and families that would owe more in tax to the government. Most, but not all, of the families that would be made worse off would have their net tax bill rise that is, they would owe more to the government in combined income and payroll taxes when the combined effect of the EITC reductions, child tax credit, and changes in income tax rates are considered. Families that would owe more to the government are considered to be subject to a tax increase. Families that would have a smaller negative tax liability are not considered to be subject to a tax increase.
5. These figures include the employee share of the payroll tax.
6. The estimate that nearly five million families with children would be made worse off is generally consistent with Treasury and Joint Tax Committee estimates of the effects of the tax provisions of the budget reconciliation bill that Congress passed in late 1995 and the President subsequently vetoed. Both Treasury and the Joint Tax Committee estimated that between three and 3.5 million low-income working families with children would be made worse off by the combined effects of the EITC reductions and the $500 child credit in that legislation. Because the new proposal eliminates or reduces the size of the child credit for several million additional families by allowing the credit to offset only the income tax liability that remains after a family's EITC is subtracted the number of families adversely affected by the tax provisions of the Dole proposal is somewhat higher.
7. See footnote 3.
8. Most families of these types with incomes below these levels would neither gain nor lose from the tax provisions of the Dole plan.
9. The proportion of children ineligible for the credit because their family's income is too high would grow modestly over time.