Federal Policy Should Support Public Investments and Progressive Taxation
Over the past two decades, there has been a significant shift toward achieving policy goals through the tax system. This has included an expansion of refundable tax credits, such as the Earned Income Tax Credit (EITC) and the refundable portion of the child tax credit. However, the tax system still includes large numbers of incentives provided through tax deductions, which provide a greater benefit to higher income households and no benefit at all to households who do not owe federal income taxes. This is both morally unjustified and economically inefficient; whenever possible, deductions and non-refundable credits should be replaced by refundable credits. As part of its 2010 Federal Policy Recommendations, CLASP recommends that Congress:
Make permanent tax provisions in the recovery act that helped low-income families. The American Recovery and Reinvestment Act of 2009 (ARRA) created a new refundable Making Work Pay tax credit, and lowered the income threshold at which families begin to benefit from the child tax credit to $3,000. President Obama's FY 2010 budget called for an extension of these improvements, which have been estimated to have lifted more than 3 million Americans out of poverty in 2009. Congress should make these improvements permanent.
Make more tax credits refundable. Most tax credits that are not targeted to low-income workers are not refundable, meaning that individuals and families who do not owe federal income taxes are not eligible for them. This makes these credits regressive, and denies their incentives to low-income workers and families. Tax credits including the Dependent Care Tax Credit, the Savers Credit, and the higher education tax credits should be made refundable.
Adopt tax policies that provide a sustainable revenue base for the nation's shared priorities. Next year, the large tax cuts enacted in 2001 and 2003 are scheduled to expire. These cuts mostly benefited high income households, and deeply undermined the nation's budgetary stability, resulting in significant deficits even before the current economic crisis. To ensure the government's ability to make the short- and long-term investments that are critical to ensuring all Americans have economic opportunities, it is necessary to adopt tax policies that provide for a realistic revenue base. Congress should allow the tax giveaways to the highest income households to expire, including the existing reductions in the taxation of capital gains, dividends, and estates.