Revised May 30, 2003
ENOUGH ROOM IN THE TAX BILL FOR
THE LOW-INCOME CHILD TAX CREDIT PROVISION?
Isaac Shapiro and Robert Greenstein
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The tax bill that President Bush signed May 28
dropped a child tax credit provision included in the Senate version of the
bill that would have assisted close to 12 million children in low-income
working families, many of whom receive no benefit from the final
legislation. A front page story in the New York Times on May 29
highlighted the absence of this provision.
In explaining why this provision was dropped, a spokeswoman for the
House Ways and Means Committee told
the New York Times that the provision was in the bill when the cost
of the package was tentatively set at $380 billion but was one of the
provisions that had to be dropped to reduce the bills cost to $350
billion. Since the cost of the dropped provision was only $3.5 billion, it
appears this decision was not necessary. It would not have been difficult
to provide room for the provision in the bill.
- The cost of the deleted low-income child
tax credit provision $3.5 billion equals one percent of the official
cost of the final bill. It equals just 2.3 percent of the official
cost of the capital gains/dividend tax cut and thus could have been
included if the capital gains/dividend provision had been scaled back
- Alternatively, room could have been made for the child credit
provision by slightly reducing the acceleration in the reduction in the top
income tax rate. The
Center estimates that for each
0.1 percentage point the top rate is reduced, the cost is $1.3 billion.
Thus, if the top rate had been reduced to 35.3 percent in 2003 through 2005
(and 35 percent thereafter) rather than to 35.0 percent now, the savings
would have been $3.9 billion, which would have been more than enough to pay
for the low-income child tax credit provision. Had this been done, a very
large cut in the top rate would still have been included. In fact, people
with incomes of more than $1 million per year still would have received an
average tax cut of about $88,000 in 2003, rather than the $93,500 average
tax cut they will receive under the legislation as enacted.
- A third way that room could have been made for the child
credit provision was by including in the legislation some measures to close
abusive corporate tax shelters. As The Washington Post has
reported, the Senate Bill included provision to crack down on abusive
corporate tax shelters, combat some accounting scams such as those pursued
by Enron Corp., prevent
U.S. companies from moving
their headquarters to post office boxes in offshore tax havens such as
Bermuda and limit grossly inflated deferred
compensation plans for corporate executives.
These Senate provisions would have saved more than $25 billion. All
of these provisions were dropped in conference. Only $3.5 billion of this
more than $25 billion in savings would have been needed to accommodate the
child-tax credit provision.
- The cost of the deleted child credit provision is dwarfed by
the tax cuts the bill provides to people whose incomes above $1 million.
The legislation will provide in the neighborhood of $90 billion in tax cuts
to the approximately 200,000 households with incomes over $1 million if
none of the provisions in the legislation are extended, and larger amounts
if, as now seems likely, a number of the provisions are renewed. By
contrast, there are 11.9 million children in low-income working families
that would have benefited from the low-income tax child credit provision
that was jettisoned in conference.
- The low-income child tax credit provision that was dropped
was simply an acceleration of a change that will take effect in 2005. Its
costs thus would have been limited to this year and next. This contrasts
with many tax cut provisions included in the legislation that are likely to
be extended and ultimately to cost much more than the official cost
estimate for the legislation indicates.
The choice to exclude the low-income provision
also reflects a significant inconsistency in the legislation. The new law
accelerates the child tax credit provision of the 2001 tax cut that is
targeted on middle- and upper-income families, but not the child tax credit
provision of the 2001 law targeted on low- and modest-income working
families. (Similarly, the new tax law accelerates the marriage penalty
relief provisions enacted in 2001 for middle- and upper-income families,
but not the marriage penalty relief provision of law that is targeted on
low-income working families.)
Other Claims by Ways and
Means Spokeswoman Are Also Off-Base
In the New York Times
article, the Ways and Means Committee spokeswoman also said:
This bill does a lot to help people who need
help. But its primary purpose was to generate jobs.
The tax provisions in the bill are of little
benefit to low-income households, probably the group that needs help the
most. According to data from the Tax Policy Center, the bottom fifth of
households will receive tax cuts from the legislation that average just $1
in 2003, while the next-to-bottom fifth will receive tax cuts averaging
$38. This contrasts with the average tax cut of $93,500 that will go to
people with incomes of more than $1 million.
Furthermore, tax cuts targeted on lower-income
families are probably the most effective form of tax measure for generating
immediate increases in demand, and thus job creation. Economic research
shows that low-income families are more likely to spend additional income
they receive through a tax cut than higher-income families are. Only if
tax cuts are spent will they boost the economy now. For this reason, the
deleted Senate provision would likely have been more effective, per dollar
of cost, in boosting the economy than most or all of the tax-cut provisions
that were enacted.
For further information on the new tax law and
the low-income child tax credit provision, see the Center on Budget and
Policy Priorities analysis How the New Tax Law Alters the Child Tax Credit
and How Low-Income Families Are Affected.
David Firestone, Tax Law Omits $400 Child Credit for Millions, The
New York Times,
May 29, 2003.
Jonathan Weisman, Late Deals Got
Tax Cut Done, The
Washington Post, May