ECO-Mon-0019-Stock iStockphoto/DNY59

The purpose of this article is to put forward proposals that might be useful in simplifying the maze of tax credits that are typically available to low-income individuals under the tax code. Some of these include the earned income tax credit, the child tax credit (CTC), and the refundable child credit. Each of these programs has a bewildering array of eligibility rules, with the result that some families that are entitled to the benefits do not file for them, while others that are not entitled receive benefits anyway. The size of these programs has also grown tremendously over time. For instance, in 2006 the EITC paid out almost $44 billion in tax credits, while the CTCs paid out about $48 billion. Overall, the size of the credits has grown by nearly 70 percent in just six years. Therefore, an understanding of the actual redistributive impact of these credits and the targets that they were intended to achieve is critical.

Our article has two objectives. The first is to analyze the availability and the amount of the credits going to low-income people. In other words, who actually benefits under the current system of tax credits? Second, we propose several alternatives to the existing tax credits that we hope will substantially simplify the tax code while maintaining the redistributive principles that underlie it. As it stands today, the tax code provides incentives to work and to save, and it also attempts to offset the costs of raising children (such as child-care expenses) and providing them an education. Therefore, we assess different proposals that might maintain those incentives, either by providing credits only to families with children or only to individuals who work. Because it is unclear what weights society assigns to each of these incentives, we provide several choices while explaining the costs associated with each and the target group that would benefit from each choice. We believe this is the best approach to reaching our final objective of having one simplified system of tax credits.

Click here to view the full text of this article as an Adobe Acrobat PDF.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. Lawrence B. Lindsey is a visiting scholar at AEI. Aparna Mathur is a research fellow at AEI.