Refundable Tax Credits
Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education. These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012.
Apr 17, 2017 | PERMALINK »
The Important Role of Tax Policy in Promoting Economic Mobility
Tax preferences are an important policy tool, totaling $1.2 trillion each year. Through the tax system, the federal government promotes homeownership, college attendance, retirement savings, and health insurance. However, these tax preferences are “upside down,” directing most of the relief to high-income households and those whose income comes from wealth rather than earnings. Even those who receive these subsidies often don’t see themselves as benefitting from government help.
Since 1970, U.S. tax policy has become less progressive, contributing to sharp increases in income inequality, which has now reached levels not seen since the Great Depression. Economists say that income inequality has increased because productivity gains have primarily benefited top earners, while wages for virtually everyone else have stagnated. Recent economic research also cites U.S. tax policy as a contributor to income inequality because it funnels pretax income to higher-income households and exacerbates after-tax income inequality. Inequality is problematic because it has been linked to increased economic instability and decreased social mobility, and while it is not unique to the United States, we perform the poorest among the top 22 wealthiest nations in utilizing taxes and transfers to alleviate inequality.
CLASP is dedicated to protecting, strengthening, and expanding tax policies that promote economic mobility. To further that commitment, we’ve joined the recently launched Tax Alliance for Economic Mobility. The Alliance convenes racial justice advocates, asset-building advocates, tax reform experts, and researchers to identify short and long-term policy priorities to expand savings and investment opportunities for lower-income households through tax reform.
The Alliance believes that tax policies should be inclusive, progressive, and equitable. Tax policy should prioritize benefits for lower-income households and households of color, as opposed to disproportionally benefiting upper-income and wealthy people. The Alliance also encourages efficiency by reducing barriers and making enrollment automatic. Finally, policies should be easy to understand and promote transparency, allowing outcomes to be tracked and monitored. Within these criteria, the Alliance works across several policy areas.
Tax Credits for Low-Income Workers: The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are well targeted. There is strong research evidence that EITC encourages work; improves child achievement, long-term educational attainment, and earnings; and leads to positive health outcomes. Reforms should build on this success, protecting access for mixed-status families and expanding credits for workers without children.
Homeownership and Housing: The Mortgage Interest Deduction (MID), homeownership subsidy provided through the federal tax code, disproportionately benefits high-income, predominantly white households. Reforms should focus on equally distributing federal investments in homeownership; specifically, Congress should reduce subsidies for upper-income households and target support to lower-income households and communities of color.
Higher Education & College Savings Tax Expenditures: Tax-based aid has the potential to expand access to college, but it often falls short. The top 40 percent of households benefit far more from tax preferences than the bottom 40. Reforms that would promote college access include targeting aid to low- and moderate-income households, more quickly providing benefits to resource-constrained students, and simplifying existing programs.
Retirement Security: Stagnating wages and lower earnings have made it difficult for low-income communities and communities of color to prepare for retirement or receive Social Security benefits that will meet their basic needs. Yet federal tax subsidies aimed at supporting retirement security overwhelmingly benefit upper-income households. To reverse this trend, reforms should expand access to workplace retirement accounts and ensure retirement savings taxes are equitable for all income earners.
CLASP’s participation in the Tax Alliance for Economic Mobility affirms our dedication to evidence-based policies that improve low-income people’s lives. As Congress turns its attention to federal tax reform, CLASP urges policymakers to focus on changes that help low-income households climb the ladder economically as well as provide the revenue critical to a well-functioning government.
To learn more about how CLASP and the Alliance are advancing tax policies that promote economic mobility, please contact Carrie Welton.
- Katherine Saunders and Elizabeth Lower-Basch | Apr 01, 2015 Education Tax Credits: Refundability Critical to Making Credits Helpful to Low-Income Students and Families
- Helly Lee and Andrea Barnes | Sep 16, 2014 EITC Expansion Proposals: What’s at Stake for Young Workers
- Elizabeth Lower-Basch | Aug 07, 2013 Poverty Trends: Declining Wages Require Growing Income Supports
- Elizabeth Lower-Basch and Julie Strawn | Apr 15, 2013 Comments on Education and Family Tax Benefits
- Helly Lee | Feb 04, 2013 Research Shows Long-Lasting Benefits of EITC
- Carrie Welton | May 16, 2017 The Child Tax Credit: A Critical Anti-Poverty Tool for Children in Immigrant Families
- Carrie Welton | Apr 17, 2017 The Important Role of Tax Policy in Promoting Economic Mobility
- Jan 27, 2017 EITC Awareness Day: 10 Reasons to Love the EITC
- Jan 04, 2017 Delaying Tax Refunds Hurts Hardworking Families
- Nov 09, 2016 Veterans Defended Us, Now We Need to Defend and Strengthen the Safety Net for Them