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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.
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.