How to reforming child and work provisions in the federal income tax

In a new Tax Policy Center paper, economists draw on many recent tax-reform proposals to design a plan that separates the income tax’s work and child provisions, simplifies filing, and distributes tax benefits more equally.

Lucy Nicholson/Reuters
Seven-month-old Amy Zayas waits in line with other impoverished children and their families to receive free back-to-school supplies from the Fred Jordan Mission on Skid Row in Los Angeles, California, U.S., October 6, 2016.

The federal income tax is packed with provisions aimed at subsidizing and encouraging work and helping families with children. While well intentioned, they complicate the tax code, fail to distribute tax benefits fairly, and often fail to accomplish their desired goals.

In a new Tax Policy Center paper, Jim Nunns, Elaine Maag, and Hang Nguyen draw on many recent tax reform proposals to design a plan that would separate the income tax’s work and child provisions, simplify filing, and distribute tax benefits more equally across intended recipients. Let’s consider each issue in turn.

Children: The plan would roll the dependent exemption for children into the child tax credit (CTC), more than doubling the credit from $1,000 to $2,012.50 (indexed for inflation). It would also raise the credit’s age limit by two years to 19, and make it fully refundable so all families would get the full benefit.

The plan would also replace the child-related benefits of the earned income credit (EITC) with a new supplemental CTC of up to $2,400 for one child and double that for families with more than one child. The new credit would phase in and out like the EITC. The changes would provide more uniform benefits for children and make it easier for families to claim them.

Work: The plan would make the EITC the same for all workers. Unlike the current EITC, the new version would no longer be tied to the number of children in a family or have the current age restrictions for childless workers. (Dependents could not get the credit.) Working spouses could each claim a credit, which would equal 15.3 percent of up to $10,000 of earnings and phase out at higher incomes. The credit would increase work incentives for low wage workers, particularly those without children.

Simplification: The plan would eliminate the head of household and married filing separately filing statuses. Instead, it would nearly double the standard deduction for the remaining two filing statuses (single and married) by combining current standard deductions (including that for age and blindness) and taxpayer exemptions. That change would reduce the number of itemizers by 40 percent, simplifying their tax returns. The number of families subject to the alternative minimum tax would likewise be substantially reduced. The plan would also streamline the definitions of qualifying children, relatives, and taxpayers and reform the taxation of dependents.

The plan wouldn’t be cheap—the authors estimate that it would reduce income tax revenues by nearly $1.1 trillion over ten years. Poorer households, especially those with children, would benefit most: The lowest-income 20 percent would see their after-tax income rise an average of 8.3 percent in 2017. The plan would boost after-tax incomes of low-income families with children by 13.5 percent. Overall, after-tax incomes would increase about 0.8 percent.

The paper also considers a number of alternatives to the basic plan that could lower revenue costs and better meet other policy goals.

Jim, Elaine, and Hang have put together an innovative plan to simplify and refocus the federal income tax that could provide ideas for tax reform next year. Take a look at the paper to learn more about how it would work.

This story originally appeared on TaxVox.

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