Moving Towards a Unified Credit for Low Income Workers

The purpose of this paper 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 current tax code. Some of these include the Earned Income Tax Credit, the Child Tax Credit and the Additional Child Credit. Each of these programs has a bewildering and often confusing array of eligibility rules, with the result that some families that are entitled to these benefits do not file for them, while others that are not entitled receive benefits anyway. Moreover, there has been a tremendous growth in the size of these programs over time. For instance, in 2006, the EITC paid out almost $44 billion in tax credits while the child tax credits paid out about $47 billion. Overall, the size of all the different credits has grown by nearly 70 percent in just a 6 year period. Therefore an understanding of the actual redistributive impact of these credits and the targets that they were intended to achieve is critical today. Our paper therefore has two objectives. The first is to provide an analysis of the availability and the amount of the credits going to low income people. In other words, who is actually benefiting 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 as it relates to the credits, while maintaining the redistributive principles that underlie it. As it stands today, the tax code provides incentives to work, to save and 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 these incentives either by only providing credits to families with children or individuals that work. Since it is unclear what weights society assigns to each of these incentives, we believe that providing an array of choices but explaining the costs associated with each and the target group that would benefit from each choice is the best approach to reach our final objective of having one simplified system of tax credits.

Click here to view the full text of this working paper 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.

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

Lawrence B.
Lindsey
  • Lawrence B. Lindsey has held leading positions in government, academia, and business. He has been assistant to the president and director of the National Economic Council at the White House. He also served as a governor of the Federal Reserve System, special assistant to the president for domestic economic policy, and senior staff economist for tax policy at the President's Council of Economic Advisers. Mr. Lindsey taught economics at Harvard University and is currently president and CEO of the Lindsey Group. He is the author of Economic Puppet Masters (AEI Press, 1999) and The Growth Experiment (Basic Books, 1990).
  • Phone: 7032183950
    Email: llindsey@aei.org

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

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