Congress passed a new child
tax credit bill last week amid partisan controversy, clashes between the House
and Senate chambers, and the usual class-warfare rhetoric. The debate raised
uncomfortable questions about which Americans “deserve” a tax break, but the
larger question – whether government deserves so much of our money – went
The biggest issue was
whether lower-income Americans, who often pay little or no income taxes, ought
to get a child tax credit. This is a legitimate question when we consider some
have zero tax liability because they do not work at all. If an individual truly
pays no federal taxes, then any payment he receives from the government is not
really a “tax credit,” but rather a welfare payment.
An overwhelming majority of
the poor do work, however. The working poor certainly do pay federal taxes in
the form of payroll taxes, also known as FICA. Even a minimum wage worker
clocking 40 hours per week would pay hundreds of dollars annually in payroll
taxes. So if Congress really wants to help the working poor, payroll taxes must
be lowered. But while the self-styled champions of the poor continually clamor
for income tax increases and more social services spending, they ignore the
obvious and immediate benefits of a payroll tax cut for low-income
The embarrassing problem
for the poverty crowd in Washington is that payroll taxes fund Medicare and
Social Security benefits. Despite all the talk about trust funds and lockboxes,
payroll taxes are spent immediately to pay current beneficiaries of those
programs. Any cut in payroll taxes therefore threatens to expose that Social
Security “accounts” contain only IOUs. This is why the left is reluctant to
truly help the poor by lowering or eliminating payroll taxes.
I’m for lowering
everybody’s federal tax bill, because I believe every dollar left in the
private economy benefits all Americans much more than a dollar sent to
Washington. Therefore, I believe tax credits should be refundable against both
income and payroll taxes. For a poor family scraping by on $15,000 per year, a
$300 or $500 refund of payroll taxes could be enormous.
The changes to the child
tax credit are not final, because the House and Senate have not yet reconciled
their differences. However, the likely changes can be summarized as
middle-income families, the current child tax credit of $600 increases to
$1,000 for 2003 and 2004. If the House version prevails, this increase will
stay in effect through 2010. If not, the credit will stupidly revert to $700
in 2005 and increase to $1,000 by 2010.
families making between $10,500 and $26,000 get no relief in 2003, but must
wait until 2004 to apply for a refundable child credit. In 2004 they are
eligible for a credit of 15% of earned income.
the child credit is phased out for individuals making over $75,000 and couples
making over $110,000. Both the House and Senate proposals are likely to
increase that amount to $150,000 for married couples.
Middle-income families who qualified for child credits last year will
begin receiving $400 per child advance refund checks for 2003 at the end of