Opinion Editorial | |
| Wednesday, February 11, 1998 | |
Tax Benefit Phaseouts Unfair |
In his State of the Union Address, President Bill Clinton warned Congress
against enacting any broad-based tax cuts this year. Tax cuts should only
be "targeted," he said. In other words, only certain taxpayers
should receive tax relief and only if they meet certain criteria. Those
who do not meet the conditions simply will be left out in the cold. In last year's tax bill, Congress unfortunately endorsed the Clinton
principle. The main tax cut was a $500 credit available only to middle
income families with children. Other targeted tax cuts included in the
legislation were subsidies for education expenses and a reduction in the
capital gains tax only for those who hold assets for long periods. As a
consequence, most people saw no tax reduction whatsoever from the misnamed
Taxpayer Relief Act of 1997. Aside from the unfairness of giving tax cuts to only a few selected taxpayers
while giving nothing to the rest, targeting creates serious economic problems.
This results from the practice of phasing-out many tax benefits as incomes
rise, in order to ensure that no one who remotely can be considered "rich"
will get any kind of tax cut. Among the tax provisions that phase-out as
income rises are these:
According to Congress's Joint Committee on Taxation (JCT), there are
22 provisions in the tax law that withdraw tax benefits as incomes rise.
And many of these affect taxpayers with very low incomes. For example,
the Earned Income Tax Credit (EITC) is phased-out for single taxpayers with
incomes as low as $5,570. In effect, these phase-outs raise the true tax rate for taxpayers in
the phase-out range. In the case of the EITC, the credit is withdrawn at
a 21 percent rate for qualifying taxpayers with two children, over a range
of income between $12,260 and $30,095. This means that for such taxpayers
the effective marginal federal income tax rate is not 15 percent, the statutory
rate for people with such income, but 36 percent, a rate normally reserved
for those with incomes of at least $128,000. A new study from the JCT finds that these high effective marginal tax
rates can have very pernicious effects. Some 33 million taxpayers are affected
by phase-outs, raising the average marginal tax rate from 14.1 percent to
18.1 percent. And the impact is greatest for taxpayers with low incomes.
According to the JCT, there are 15.5 million Americans whose incomes would
normally put them in the 15 percent federal income tax bracket. But because
of phase-outs, their effective marginal tax rate is actually 22.4 percent--50
percent higher. Forbes Magazine even found a recent case in which a disabled
longshoreman in California paid an effective tax of 104 percent on his social
security disability payments. When people must pay higher taxes on each additional dollar they earn
the obvious effect is to discourage them from earning additional income.
Phase-outs also violate the principle of horizontal equity when taxpayers
with the same incomes may pay wildly different tax rates. And they add
ungodly complexity to an already complicated Tax Code. Phase-outs are bad tax policy. Congress should move quickly to eliminate
as many of them as possible. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
February 11, 1998.
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