One of the major issues in the tax bill being considered by Congress is whether those who pay no taxes should still get a tax cut. Democrats say yes, Republicans say no. The outcome could determine whether anyone gets a tax cut this year.

It may sound like a trick question, but in fact millions of Americans with no income tax liability already get a "tax cut" through the Earned Income Tax Credit (EITC). The EITC gives low-income workers a credit against their taxes of up to $3,556. However, if their actual income tax liability is less than this, they get a refund of the difference. Thus if a worker qualifies for $2,000 in EITC but only owes $800 in taxes, she gets a check from the Treasury for $1,200.

This year the EITC is expected to cost the federal government $26 billion. Of this amount only $3.6 billion actually offset peoples' tax liability. The rest, $22.4 billion, will be "refunded" to taxpayers who have no tax liability and get a check from the government instead.

In other words, although it is a provision of the tax law, the EITC essentially is a welfare spending program.

Although it is in fact a spending program, the EITC is important for tax policy because it allows politicians to say they are cutting taxes for the poor even though they pay no taxes.

Now Democrats are in effect trying to expand the EITC so that even more people will get government checks from the program. The way they propose to do this is by saying that taxpayers will be allowed to use the proposed child credit before calculating the EITC.

• Under the Republican tax bill, all families with children would receive a credit against their income taxes of up to $500 per child; however, the credit would not be refundable.

• Families owing no taxes due to the EITC or other tax provisions would not be able to use the credit because they have no liability to offset.

• Under the Democrats' plan, if a family uses the child credit to eliminate their income tax liability before calculating the EITC, they will get a larger EITC check from the government.

This arcane debate is being fought through the use of distributional tables. These tables purport to show the effects of the tax bill on families with different incomes. Since those with low incomes pay no income taxes to begin with, the only way they can get a tax cut is by making it refundable. That is why the Democrats appear to offer a bigger tax cut to those with low incomes.

Republicans respond that expanding the number of people getting a check from the government is no way to conduct tax policy. They are right. But the bigger problem is the obsession with the distributional effects of tax legislation, to the exclusion of all other considerations. Sound principles of tax policy are being cast aside, the impact of taxes on the economy is getting short shrift, and the tax code is being made even more complex just to make the tables look right.

For these and other reasons, some tax theorists are saying that distribution tables should be abandoned altogether. Professor Michael Graetz of the Yale Law School is the strongest proponent of this view. Writing in the April 1995 Columbia Law Review, Graetz attacks the distribution tables as imprecise, inaccurate, misleading and dangerous.

He concludes that "the information transmitted to policymakers through the current practice of producing distributional tables is simply bad information."

The debate over tax cuts for those who pay no taxes is further evidence that Graetz may be right.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 25, 1997.