When it comes to the Trump administration and the GOP-controlled U.S. House and Senate, things are never what they seem. For example, during the 2016 election cycle then-candidate Donald Trump promised not to touch Social Security and Medicaid, but as president, he is supporting bills that could lead to cuts in both. The GOP also claimed to care about deficits, but their tax bills would increase the debt by at least $2 trillion over the next ten years. And while the GOP loves to claim it is “pro-life” and “pro-family,” the tax bill they are so eager to pass has negative implications for families with children.
A Boon to the Wealthy
Right now there are dueling versions of the tax bill in the House and Senate, and Republicans are gearing up for a potential showdown as their window to pass reform this year narrows. The lead priority in both versions of the legislation is a radical contraction of the corporate income tax (CIT), a tax on the profits of U.S. corporations that makes up the third largest source of revenue for the federal government.
The major stakeholders of corporations—shareholders and top executives—usually have incomes well above average. That is why a tax on corporate profits is the most progressive component of the current federal tax system. It increases the extent to which individuals’ total tax burdens rise with income. The tax cuts proposed by Republicans, however, will increase income inequality. The highest percentage cuts relative to income would be enjoyed by the top 5 percent of income earners.
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Boosters in the GOP are presenting the cut to the CIT as a boon to workers rather than to the owners of corporations. But historically, the greatest efforts toward rolling back the tax have been exerted by these same owners, who not surprisingly bear most of the burden of the tax. Meanwhile, polls show that much of the general public thinks corporations pay too little tax, not too much. The difference in opinion does not reflect ignorance on the part of either owners or workers: Most economists believe that about 70 percent of the burden falls on owners. Even Professor Greg Mankiw, chief economist in the George W. Bush administration, has said as much. So it makes sense that owners want to see the tax go down, while other people don’t mind if it goes up.
Of particular benefit to the super-duper-rich, including the Trumps, would be the proposed changes to the Estate and Gift Tax. The House bill repeals it altogether while the Senate’s version retains it in reduced form. This tax, misleadingly described as a “death tax,” is a separate tax on the transfer of wealth by the very rich, either as gifts or in estates, at death. It reduces the extent to which Donald and others similarly endowed can perpetuate dynastic wealth, by passing down their fortunes to spouses and children. The tax only affects the transfer of very large estates; the current threshold—below which there is no tax—exceeds $10 million for a couple.
The effect of the corporate income tax cut and estate tax repeal are the least ambiguous features of the entire tax reform fight. Their benefits are focused on the rich.
What About Families With Children?
Both the House and Senate bills also change tax rates and brackets and eliminate a raft of deductions in the individual income tax. Many of these provisions benefit families with children. Some families would get modest tax cuts, while many others will see tax increases. The bills’ sponsors imply that absolutely everyone will get a tax cut, but that just isn’t true, according to the Tax Policy Center. The center found that “at least 7 percent of taxpayers would pay higher taxes under the proposal in 2018 and at least 25 percent of taxpayers would pay more in 2027.”
Many of the deductions the tax bills would eliminate—such as school teachers’ ability to deduct their expenditures for school supplies—have little impact on the overall cost of the policy. It would not be unreasonable to suspect that they have been enlisted as hostages, to trade for votes.
To fixate on any one provision is to mistake the forest for a limited number of trees. At the same time, it is worth talking about the potential tax increases that would result from the proposed elimination of deductions as a way to outline a better alternative approach that is devoted to helping families with children.
Here is a catalog of some proposed changes in the bills that, in isolation, could affect families with children if the GOP’s tax policy is enacted:
- The elimination of exemptions for dependents. This has a bigger negative impact the larger the family;
- Elimination of the deductions for state and local income taxes, and contraction of the deduction for property taxes. (The Senate bill eliminates these deductions completely.) This could reduce state government spending of all types, especially on programs that aid poor families with children, such as the state Children’s Health Insurance Program (CHIP) and Medicaid;
- Elimination of the deduction for student loan interest, further narrowing the accessibility to higher education for middle-class students (the Senate bill keeps this deduction);
- Taxation of tuition waivers granted to graduate students as income, with the same result (House bill only);
- Elimination of the deduction for alimony. This will add strain to relations between divorced couples, where it is usually the male who pays alimony to the female partner, who is usually left with the care of children. (The Senate bill keeps this deduction);
Then there is the much-ballyhooed change ostensibly devoted to families with children. It turns out to be limited in perverse ways. The increase in the Child Tax Credit (CTC) from $1,000 to $1,600 (or to $2,000 in the Senate bill), will not benefit many lower-income families. The reason is that the credit is limited by the extent of a family’s tax liability. If a family’s income is low enough to owe no income taxes, it receives no credit.
Currently, the CTC is limited to children under age 17. But the dependent exemption, a provision that permits the taxpayer to reduce income subject to taxation, applies to children younger than age 19, and up to age 24 for full-time college students. The question is whether this disparity will work its way into new law. If so, aside from the quantities involved (which differ for taxpayers in different brackets), for many a switch to a higher CTC along with loss of the dependent exemption is not an even-steven trade. Families with children could face higher taxes as a result.
Backing up for more of a bird’s-eye view, the basic situation to consider is that there are already a number of benefits in the current individual income tax pertaining to children. The biggest are the dependent exemption, the CTC, the Earned Income Tax Credit, and the head of household filing status. Each of these has different mechanics and complex eligibility rules, even though they are all directed at the same objective: assisting families with children.
The Republican bills increase the standard deduction, but the standard deduction is the same regardless of the number of children in a family. The bills eliminate all exemptions—including for children—and expand the CTC, but as noted above, the tax-reducing impact of eliminating an exemption may fall short of what an expanded CTC will offer. Both exemptions and the CTC are strictly limited for lower-income families, both under current law and under the Republican proposal. In the House bill there is a small add-on credit for some families—$300—but it phases out in five years.
An alternative approach is to merge these provisions into a single, expanded, simplified credit that is fully available to all families, especially those with lower-than-median incomes. “Fully available,” in this case, means what is usually described as “refundable.” In other words, the full credit is available as cash regardless of the family’s tax liability. Under this approach, the credit expands with the number of children and decreases only as income begins to approach median levels. Refundable credits have been shown to greatly enhance the well-being of low-income families.
In previous proposals, expansion of tax benefits for families with children have usually rested on the principle that a family’s credit should increase up to some threshold only as its labor earnings do. In other words, the credit is withheld from families where nobody is able to work, by choice or otherwise. Some regard this as a feature, others as a bug.
For those who see it as a bug, it would be technically simple, if politically daunting, to provide a family or childrens’ allowance through the tax code. The administrative mechanism—the IRS—is already in place, though it could use some beefing up.
Under this approach, which has the benefit of lengthy experience and voluminous historical analysis, the chief disadvantage of the so-called “universal basic income” would be avoided. Namely, since the credit would phase out at some higher income level, it would cost much less, so the need to send huge amounts of money from government to taxpayer and back to government again—with many intervening slips between the cup and the lip—would be greatly reduced.
Whether “refundable” or not, expanded benefits for families with children would reduce poverty. Research has shown that with financial assistance, children in such families have better educational outcomes, enjoy greater health, and have better chances in life.
Therefore, women as workers and caregivers would benefit from two departures from the stew that is the latest Republican tax bill: maintenance, if not expansion, of the corporate income tax and estate tax, and consolidation, simplification, and expansion of the benefits for families with children.
A common trope among some critics of the bill is to focus on its enlargement of the federal budget deficit. The resulting talking point is that tax will be “paid by our children.” This is vulnerable to criticism on several levels.
First, a deficit increase under current circumstances could increase employment, to the benefit of current and future families with children. To be sure, a Trump-fueled deficit would not be the preferred vehicle for such stimulus, but deficits under any circumstance should not be rejected out of hand. Second, the greatest spur to the well-being of children who stand to benefit the most is a progressive tax and budget system. Third, any detraction of the well-being of “our children” in the future will impact them as adults, when on average they will be richer than us. Fourth, there is a real threat that after the current blasé attitude toward deficits among Republicans, next year they will be saying “OMG, the deficit, we have to cut Medicaid, Medicare, and Social Security,” all of which will negatively impact children, directly or indirectly. And, finally, arguably the greatest threat to children both present and future is the disproportionate, burgeoning political dominance of the very rich, and the political supremacy they enjoy that will only be further cemented by reductions in their taxes.
If children are to live in a country where democracy still means something, the Trump/Republican agenda on taxes demands an unequivocal rejection.