Chart of the Day: Growth of Refundable Tax Credits

Wednesday, August 22nd, 2012 and is filed under Blog, Taxes

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For all of Obama’s talk about the plethora of special interest loopholes in the tax system for the evil rich, he fails to disclose the fact that the largest exemptions in the tax code come in the form of refundable tax credits to low-income tax filers.  These tax credits, most prominently, the Additional Child Tax Credit and Earned Income Credit, are so pervasive and comprehensive that they allow 29% of tax filers to enjoy a negative tax liability.  In simple English, that means they make money off the tax code.

Here are the relevant statistics for the two largest refundable tax credits in 2009 (CRS report):

Earned Income Tax Credit

The EITC is granted primarily to low-income households with children, who make under $42,000.  In 2009, the maximum value of the credit was $457 for a childless taxpayer, $3,043 for a taxpayer with one child, $5,028 for a taxpayer with two children, and $5,657 for a taxpayer with three or more children.

What was the cost for those credits?

Number of Tax Returns with Credit Claimed: 25.70 million
Number of Tax Returns with Refundable Portion Claimed: 24.92 million
Total Budgetary Cost: $54.98 billion
Budgetary Cost of Refundable Portion: $53.99 billion

Hence, almost the entire cost of the EITC is paid out in the form of a handout.

Child Tax Credit

The Child Tax Credit reduces a filer’s tax liability by $1,000 per dependent child.  It begins to phase out for single filers making $75,000 and joint filers making $110,000.  The standard Child Tax Credit is non-refundable; however, low-income families benefit from the Additional Child Tax Credit (ACTC), which is refundable.  Approximately 21 million of the 35.6 million who receive child tax credits enjoy negative tax liabilities through the ACTC.  The total budgetary cost of the CTC is $54.33 billion, while the cost of the refundable portion was $27.50 billion.

We now spend well over $200 billion in refundable tax credits, including $7 billion for illegal aliens.  Over the past three years, Obama has dramatically grown the refundable tax credits even more, but the data is not fully available.

While we all want a simpler flatter tax without the exemptions and carve outs, such reforms cannot be implemented until the marginal rates are lowered.  Moreover, those credits are taken by people who are already paying a lot in taxes.  Why doesn’t Obama want to talk about the refundable tax credits for those who don’t pay taxes?  Here is the chart of the day from the Tax Foundation showing the growth of refundable tax credits, even compared to the growth of other tax credits.

Source: Tax Foundation

Obviously, we don’t need to raise taxes on anyone who actually pays taxes.  And we certainly don’t want to place a large burden on low-income earners.  But there is no reason why so many people should make money off the tax code.  Everyone should pay at least a tiny percentage in federal income taxes, or at the very least break even.  It is this sort of dependency and hyper-progressive of our tax code that is helping to cement an inveterate voting majority for Democrats.