BEYOND THE NUMBERS
GOP’s Stated Concern for Promoting Work Absent from 2017 Tax Law
Republican policymakers claim that the damaging changes they’re proposing to SNAP (formerly food stamps), housing assistance, and Medicaid will promote work. For example, the House Agriculture Committee farm bill would enact unworkable, expanded work requirements that would take benefits away from people who don’t meet them, despite the evidence that such requirements do little to improve employment. Meanwhile, the major tax law enacted last year, which reallocates trillions of dollars, gave Republican policymakers a golden opportunity to truly encourage and reward work — but they didn’t take it:
No Earned Income Tax Credit (EITC) improvements. The EITC is one of the most powerful federal policy tools for boosting work and employment, research shows. A growing body of research also finds that children in families receiving the EITC’s income boosts are healthier, do better in school, and earn more as adults. House Speaker Paul Ryan has long called for expanding the inadequate EITC for low-paid childless adults and non-custodial adults, who are the lone group that the federal tax code taxes into (or deeper into) poverty. He reiterated this month that a more adequate EITC for these workers “helps pull them into the workforce by making work pay.”
But Republican lawmakers never proposed any such EITC expansion in drafting the new tax law, even though an EITC improvement that Ryan favors and President Obama proposed would have cost less than the law’s large tax cut for heirs of the wealthiest estates, described below. (The Ryan-Obama proposal would cost about $70 billion over ten years, compared to about $80 billion for the new estate tax cut.)
- An eroding EITC to help finance corporate tax cuts. Worse, the tax law weakened the EITC over time. To help offset the cost of its permanent corporate tax cuts, the law cuts health coverage and adopted a new inflation measure (the “chained” Consumer Price Index) to adjust tax brackets and certain tax provisions each year that will grow more slowly than the regular CPI. That will raise taxes on households at all income levels over time. Among other things, it will cause the maximum EITC to rise more slowly than under prior law, eroding the credit’s value for millions of working households. For example, the credit in 2027 for a married couple making $40,000 with two children will be $319 smaller than under prior law ($4,675 versus $4,994).
- Millions of low-income working families excluded from Child Tax Credit (CTC) improvements. While the tax law doubles the maximum CTC, about 10 million children under age 17 in the lowest-income working families will receive no CTC increase or a token one of $1 to $75. Millions more will receive more than $75 but less than the full $1,000-per-child increase. Like the EITC, the CTC goes only to working households; it phases in with earnings and improves the educational and future earning opportunities for children in families receiving the credit.
- Larger inheritances for heirs of the wealthiest estates. The law delivered a tax-cut windfall to heirs of the wealthiest 2 out of every 1,000 estates in America by doubling the value of estates that’s exempt from the tax, from $11 million per couple ($5.5 million per person) to $22 million per couple ($11 million per person). The few estates large enough to remain taxable — those worth more than $22 million per couple — will receive a tax cut worth $4.4 million apiece. Doubling the estate tax exemption will discourage work among wealthy heirs by making their large inheritances even larger, research suggests. Treasury Department analyst David Joulfaian estimates that “an inheritance of $1 million, other things equal, reduces labor force participation by about 11 percent.”
- New incentives for corporations to move operations offshore. The tax law moves the U.S. tax code towards a “territorial” system that effectively exempts large parts of U.S. multinationals’ foreign profits from U.S. corporate tax, which may encourage them to shift profits and operations abroad and, in this way, hurt U.S. workers. And the law’s complex rules that are designed to limit those effects perversely have their own incentives to shift profits and operations offshore, as we and other tax experts have explained.
Finally, who will end up paying for the law’s tax cuts, which are skewed to the wealthy and corporations and will add $1.9 trillion to deficits over ten years? If the Republican proposals for deep program cuts become law, most households will be net losers from the law — they’ll lose more from the program cuts to pay for the tax cuts than they’ll gain from the tax cuts themselves. Only the highest-income households will be better off.
Policymakers should restructure the tax law and reallocate its massive tax cuts for wealthy people to address pressing national needs, including doing more to encourage and reward hard work.