The Democratic senator from New Jersey and presidential candidate Cory Booker wants to cut the taxes of 150 million Americans. But is what he’s proposing a tax cut or a welfare increase?
After declaring his intention to run for president, Booker unveiled a new proposal called the Rise Credit that would expand the existing Earned Income Tax Credit (EITC). His plan calls for increasing the number of Americans eligible for the tax credit as well as raising the maximum benefits that one can receive. Workers with no children would especially benefit under his plan. Their maximum credit, currently just $519, would increase to about $4,000.
Booker would finance his $2.5 trillion proposal by taxing income from investments as ordinary income instead of taxing it at a lower capital-gains rate. “It’s unconscionable that hedge fund managers can pay a lower percentage of their income in taxes than their secretaries,” said Booker. “That’s wrong and must change. Creating a fairer, more just tax code begins with putting money in the pockets of Americans who are struggling to get ahead.”
Senator Booker is not alone. Other Democrats have introduced similar proposals that mimic or build on the EITC.
Sen. Kamala Harris (D-Calif.) has introduced in the Senate the LIFT [Livable Incomes for Families Today] the Middle Class Act (S.4). The legislation “provides middle class and working families with a tax credit of up to $6,000 a year — or up to $500 a month — to address the rising cost of living.” Taxpayers “must be at least 18 years of age to receive the credit and may elect to receive payments of the credit in advance on a monthly basis.” Harris’s proposal would be financed by repealing the Tax Cuts and Jobs Act (TCJA) “with the exception of provisions that provide relief to taxpayers with under $100,000 in annual income” and “assessing a fee on financial institutions with total consolidated assets of more than $50 billion.”
Sen. Michael Bennet (D-Col.) and Sen. Sherrod Brown (D-Ohio) have introduced the American Family Act. It would “create a new $300 per-month, per-child credit for children under 6 years of age and a $250 per-month, per-child credit for children 6 to 18 years of age — tripling the credit for all children and, for the first time, making the credit fully refundable.”
Brown has also introduced the Grow American Incomes Now Act (GAIN). It would increase the number of Americans eligible for the EITC, roughly double the maximum benefits that one can receive, and increase the credit for childless workers almost sixfold.
Bennet and Brown, along with Sen. Dick Durbin (D-Ill.) and Sen. Ron Wyden (D-Ore.), are behind the Working Families Tax Relief Act (WFTRA). It would expand both the EITC and the Child Tax Credit (CTC). The WFTRA would increase the EITC for families with children by about 25 percent and quadruple the credit for workers without children. It would also allow families to receive a fully refundable $2,000 credit for each child, plus an additional $1,000 for each child under the age of six.
Every one of those Democratic proposals suffers from the same fatal flaw: Because they rely on refundable tax credits, they are welfare increases and not tax cuts.
Tax deductions — along with their cousins tax exemptions, tax exclusions, and tax loopholes — lower the amount of taxes owed by Americans to the federal government. They are not subsidies that have to be “paid for.” It doesn’t matter what the deductions are for, what amount they are, whom they benefit, or why they were instituted, they are always a good thing, no matter how many pages they may add to the tax code or tax forms. Tax deductions reduce the amount of income subject to tax.
But tax credits are better.
Tax credits also lower the amount of taxes owed by Americans to the federal government. They also don’t have to be “paid for.” Likewise, it doesn’t matter what the credits are for, what amount they are, whom they benefit, or why they were instituted, they are always a good thing, no matter how many pages they may add to the tax code or tax forms. Tax credits are better than tax deductions because they are a dollar-for-dollar reduction of the amount of income tax owed.
Tax credits may reduce the tax owed to zero. If that happens, no remaining credit can be taken. And if, because of tax deductions, there is no taxable income to begin with, then no credit can be taken.
And then there are refundable tax credits.
A refundable tax credit is treated as a payment from the taxpayer like federal income tax withheld or quarterly estimated taxes paid. If the “payment” is more than the tax owed after regular tax credits are applied, then the taxpayer receives a refund of money he never actually paid in. Refundable tax credits are welfare, just like Temporary Assistance to Needy Families (TANF); Medicaid; the Supplemental Nutrition Assistance Program (SNAP); the National School Lunch Program (NSLP); Women, Infants, and Children (WIC); energy assistance; housing assistance; the Children’s Health Insurance Program (CHIP); and Supplemental Security Income (SSI). In fact, refundable tax credits are the ultimate form of welfare because they are payments made in cash instead of payments made to third parties, as in Medicaid, or an amount deposited on an Electronic Benefit Card (EBC), as in the food-stamp program. And no amount received as a tax refund is counted as income when determining eligibility for federally funded welfare programs.
Low-income Americans already have three refundable tax credits: the American Opportunity Tax Credit (AOTC) and the aforementioned EITC and CTC.
The maximum AOTC is $2,500, 40 percent of which is refundable. The maximum CTC is now up to $2,000 per child, of which $1,400 is refundable, up from $1,000 in previous years. The amount of one’s EITC benefit depends on a recipient’s income and number of children. Currently, the maximum amount of EITC that one can receive is:
- $519 with no qualifying children
- $3,461 with one qualifying child
- $5,716 with two qualifying children
- $6,431 with three or more qualifying children
Democratic proposals to expand existing, or create new, refundable tax credits are not tax cuts. They are proposals to increase welfare. They may have fancy names. They may have the support of the masses. But they should be seen for what they are: wealth-redistribution, income-transfer, welfare schemes masquerading as tax cuts.