Child Credit Increases Marginal Tax Rates
June 9, 2003
The increased child credit in the just-enacted tax bill is not refundable to people who don't pay income taxes. However, last week the Senate voted to extend the child tax credit to nontaxpayers. As a trade-off with Democrats, Senate Finance Chairman Chuck Grassley (R-Iowa) insisted on giving the $1,000 tax credit to more higher-income families.
The unintended consequence of this stretched-out phaseout at higher income levels is an increase in marginal tax rates that "all but wipes out the just-passed Bush tax cuts for these taxpayers," says the Wall Street Journal.
- Marginal tax rates are raised because the phaseout in the per child tax credit reduces its value by about $50 for each $1,000 of rising income.
- This raises marginal tax rates for taxpayers in the phaseout range by about five-percentage points until the tax credit is gone, according to Steve Entin of the Institute for Research on the Economics of Taxation.
The couples subject to this phaseout were mostly in the old 27 percent and 30 percent tax brackets, now down to 25 percent and 28 percent under the Bush tax rate cuts. But the phaseout will push their actual marginal rates back up to 30 percent and 33 percent.
- In the Bush tax cut, the $1,000 credit starts to phase out for couples making more than $110,000 until it goes to zero at about $150,000.
- Grassley's bill raises that starting phaseout income level later in this decade to $150,000 before going to zero somewhere approaching $200,000.
Marginal tax rates matter because they affect decisions to work, save and invest. Taxpayers confronted with the phaseout will actually have less incentive to produce more income than they did before the Bush cuts.
Source: Editorial, "Grassley Incentive Killer," Wall Street Journal, June 9, 2003.
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