While Democrats opposed George W. Bush's campaign proposal for a massive
tax cut, his package did include one idea worth salvaging: doubling the
child tax credit. Created in 1997, the credit was designed to help families
defray the cost of raising a child. With a little adjustment for low-income
working families, this proposal could turn out to be an attractive option
for reducing the EITC's work and marriage penalties described on the previous
pages.
The adjustment would be to make the credit refundable, so that even families
with little earned income would benefit. The child tax credit is currently
worth $500 per child but only to families with incomes high enough that
they owe income taxes. Bush proposed to raise the credit from $500 to
$1,000, and to extend it to families with incomes up to $200,000 a year,
up from the current limit of $110,000. His proposal would cost roughly
$20 billion a year, but lower-income working families would still be left
out.
Rather than extending the credit to more affluent families, Democrats
should insist on making the credit available to families with low earnings
(who typically pay little or no income tax but pay the full hit in payroll
taxes). Combined with proposals for expanding the EITC (outlined in this
issue by Will Marshall), this simple idea could provide common ground
in the coming debate over tax cuts.
Doubling the tax credit and making it refundable would combine conservative
and progressive goals. It would provide the general tax relief that Bush
and the Republicans seek, while offsetting the tax penalties that poor
families face when they go to work, get married, and begin moving up the
income scale.
Another option is to make the credit partially refundable. According
to the Brookings Institution's Isabel Sawhill, this would contain the
credit's cost while also creating even stronger incentives for work. Under
this approach, the credit would be tied to family income and would rise
as earnings grow. But it could never exceed $1,000.
An expanded and refundable child credit, combined with a moderate EITC
expansion, could prove to be a winning formula for the new president and
Congress. It could be the tax cut that both progressives and conservatives
could love.
Blueprint Keywords: Extra EITC
