Director of Federal Tax Policy
In high-profile speeches on tax reform, Senator Mike Lee (R-UT) has called forcefully for expanding opportunity and helping parents raising children. Unfortunately, the tax reform plan he recently detailed — which sets two income-tax rates of 15 and 35 percent, eliminates the Alternative Minimum Tax, repeals or reforms some major deductions, and, centrally, creates an additional Child Tax Credit — falls far short of his stated goals.
The plan gives its biggest benefits to the wealthiest one-tenth of 1 percent of tax filers and costs more than $2 trillion in lost federal revenue over ten years, according to a new analysis by the Urban-Brookings Tax Policy Center (TPC). Also, its Child Tax Credit proposal excludes many working-poor families struggling to raise their children. Worst of all, many of these families would lose significant amounts of child tax credits and marriage penalty relief they receive today.
In October, Senator Lee told a Heritage Foundation audience that “[T]he great challenge of our generation is America’s growing crisis of stagnation and sclerosis — a crisis that comes down to a shortage of opportunities,” adding:
“This opportunity crisis presents itself in three principal ways:
- immobility among the poor, trapped in poverty;
- insecurity in the middle class, where families just can’t seem to get ahead;
- and cronyist privilege at the top, where political and economic elites unfairly profit at everyone else’s expense.”
He also stressed the importance of helping parents address “the enormous costs of raising their children.”
Yet a central piece of Senator Lee’s plan — a new Child Tax Credit to complement the existing credit — would do little or nothing for many working-poor families because it would be only partly refundable. (Specifically, families could only receive the credit to the extent that their combined income and payroll taxes exceeded their Earned Income Tax Credit.)
This design ignores research showing that income boosts from sources like refundable tax credits have both short- and long-term benefits for low-income families, such as improving children’s school performance and likely work effort as adults (which, in turn, increases future federal tax revenues).
Moreover, Senator Lee would limit eligibility for his new credit for those at the bottom of the income scale but not those at the top. This means that every child of a high-income banker or corporate executive would qualify, but many children of cashiers, house cleaners, and health aides wouldn’t.
Moreover, the Lee plan lets key improvements from 2009 in the current Child Tax Credit and marriage penalty relief in the Earned Income Tax Credit (EITC) — which policymakers on a bipartisan basis have extended through 2017 — expire at the start of 2018.
Picture a health aide with two kids working full time at the minimum wage (earning $14,500) in a nursing home in an affluent town. Under the Lee plan, she would lose about $1,725 in 2018: she would no longer qualify for the existing Child Tax Credit, and she earns too little to qualify for Lee’s proposed new Child Tax Credit. Meanwhile, the higher-income people with parents that the health aide cares for would qualify for the new Child Tax Credit if they have children.
In another example, a married couple making $25,000 with two children would lose about $1,670 from the Lee plan because the plan lets the 2009 EITC and Child Tax Credit improvements expire.
Given Senator Lee’s inclusive rhetoric and his stated desire to expand opportunity for working-poor families, let’s hope that TPC’s findings surprise him enough that his future plans, unlike his current plan, will help these families raise their children and move up the economic ladder.