The economy needs fixing, all agree. So naturally, every Republican presidential candidate has a plan for changing the federal tax system. Herman Cain has his 9-9-9 plan (or 9-0-9 if you’re low-income) and Rick Perry touts a 20 percent flat tax. Newt Gingrich would move to a consumption tax while Ron Paul would kiss the income tax goodbye. And almost all would cut back or eliminate refundable tax credits.
Refundable credits provide significant help to low- and middle-income families by not only zeroing out their income tax liability but also by giving them cash payments. Each year the earned income tax credit (EITC) and the child tax credit (CTC) deliver more than $109 billion of cash assistance, mostly to families with children.
This year, EITC subsidies will be as much as $3,100 for families with one child, $5,100 for families with two children, or $5,700 for families with three or more. For more than 35 years, both Republicans and Democrats have praised the credit and repeatedly expanded its reach and size. And academic research confirmes that the credit encourages people to work and lifts people out of poverty—an estimated 6 million individuals in 2009.
The Child Tax Credit provides up to a $1,000 per child to low- and middle-income families. It’s one of few support programs where a large share goes to middle-income families. That’s important in an economy where the middle class is feeling squeezed.
Despite the recognized success of both credits, the GOP candidates reveal plan after plan that either ignores refundable credits or eliminates them. The plans instead feature consumption style taxes, that, absent poverty grants, would hit the poor hard. By necessity, the poor spend all of their income so would pay tax on every dollar they get. Higher income households that can save would pay no tax on the funds they sock away.
For better or worse, the EITC and the CTC play a key role in our nation’s social safety net, helping the neediest. The candidates may not talk about shrinking or scrapping them, but just read the (not so) fine print. Even plans that claim to protect low-income families by exempting them from some taxes aren’t neutral. By cutting back or eliminating refundable credits, these plans greatly harm low-income families.