Taxes and President Biden’s American Families Plan

Colleen Ross
April 28, 2021

• Extend the Child Tax Credit increases in the American Rescue Plan through 2025 and make the Child Tax Credit permanently fully refundable.
• Make the Earned Income Tax Credit Expansion for childless workers permanent.
• Extend expanded ACA premiums tax credits in the American Rescue Plan.
• Permanently increase tax credits to support families with child care needs.
• Expand summer EBT to all eligible children nationwide.
• Create a national comprehensive paid family and medical leave program
• Offer two years of free community college to all Americans, including Dreamers.

Read the White House summary of the American Families Plan here.

Increasing the top tax rate to 39.6%

One of the 2017 tax cut’s clearest giveaways to the wealthy was cutting the top income tax rate from 39.6 percent to 37 percent, exclusively benefitting the wealthiest households—those in the top one percent. This rate cut alone gives a couple with $2 million in taxable an annual tax cut of more than $36,400. The President’s plan restores the top tax bracket to what it was before the 2017 law, returning the rate to 39.6 percent, applying only to those within the top one percent.

Enforcing compliance with the tax code

The American Families Plan would invest $80 billion to strengthen IRS enforcement, which has been decimated over the last decade and improve reporting on the income for high-earners. According to ProPublica, millionaires get audited at close to the same rate as workers with less than $20,000 of annual income. The Treasury estimates these enforcement improvements could raise $700 billion over 10 years.

Changing how capital gains are taxed

The biggest source of income for the wealthiest people in the U.S. is the profit they make from the gain on stock or other assets; this is known as capital gains. (This creates the much-talked about reality where Warren Buffet pays a lower tax rate than his secretary.)

The American Families Plan would partially fund the programs it proposes to invest in children and families by taxing income from capital gains like the taxes workers pay on their wages. It does this by closing two major loopholes that create the current system where wealth has a lower tax rate than what many middle-class workers pay on their wages.

Our partners at Americans for Tax Fairness explain how the plan closes these two loopholes:

• For people making more than $1 million a year, or the richest 0.3% of taxpayers, Biden wants to eliminate the nearly half-off tax discount they currently get when they sell assets at a profit. Instead of paying today’s top tax rate of 20% on the profits from the sale of assets like corporate stock, the rich would pay the same nearly 40% they already pay on their big salaries and other income. The current capital-gains discount is what allows a billionaire to pay a lower tax rate than a teacher or truck driver.
• Biden also wants to tax the wealthy on the accumulated gains of assets they inherit—gains that now go completely untaxed. The plan would only apply to gains over $1 million per individual, $2 million per couple ($2.5 million per couple when combined with existing real estate exemptions). This reform will narrow the wealth gap, limit the creation of economic dynasties, and raise revenue for services vital to all of us who do not inherit a fortune.

• Together, these two reforms would raise around $300 billion over 10 years exclusively from rich people. This will narrow the wealth gap and limit the creation of economic dynasties. It will also fund investments in healthcare, childcare, education and tax credits for working families that raise millions of children out of poverty. (The Tax Policy Center estimated a similar plan proposed by the Biden presidential campaign would raise $327 billion.)

NETWORK Supports Fix for Corporate Tax Giveaway

Laura Peralta-Schulte
May 8, 2020

Strengthen Working Family Tax Credits to Reduce Poverty and Expand Opportunity

Chuck Marr
July 24, 2019

Working people receive the EITC starting with their first dollar of earned income; the credit grows with their earnings until reaching a maximum level and then phases out at higher income levels. The EITC offsets federal payroll and income taxes and boosts the incomes of people who work hard but earn little. Families across the United States use EITC refunds to pay for necessities, repair homes, maintain vehicles they need to get to work, or get additional education or training to boost their employability and earning power.

Stephanie in Missouri, for example, explains: “I am a single working mom of four. My income is low, but I’m proud to support my family, running my own business from home which allows me to be here for my kids. Without the EITC my income would not be enough to cover our basic necessities, like food, housing and utilities.”

The extra money that people get from the EITC also helps them achieve more financial stability. The EITC lifted about 5.8 million people out of poverty in 2016, including about 3 million children.

The Child Tax Credit, enacted in 1997 and expanded with bipartisan support since 2001, helps working families offset the cost of raising children. It’s worth up to $2,000 per child under age 17 and is partially available to low wage working parents.

The CTC lifted roughly 2.8 million people out of poverty in 2017, including about 1.6 million children, and lessened poverty for another 13.1 million people, including 6.7 million children.

Congress Can Improve the EITC and Child Tax Credit

Despite their success, both the EITC and the Child Tax Credit have shortcomings that policymakers should address in order to target more assistance to those who need it most. The EITC for working people not raising children in the home is extremely small — too small even to fully offset federal taxes for workers at the poverty line. A childless adult earning poverty-level wages of $13,340 as a cashier, for example, owes $1,135 in federal income and payroll taxes and receives an EITC of just $172. As a result, this person is one of the over 5 million low-wage childless working people whom the federal tax code taxes into, or deeper into, poverty.

Beyond a threshold of $2,500 of earnings, the Child Tax Credit amounts to 15 cents on each additional dollar earned. This means the poorest children qualify for a very small credit or none at all, even though they are the children who need it most and for whom it would have the largest impact.

Unfortunately, when policymakers made major changes to the tax code most recently in 2017, they largely ignored the opportunity to raise living standards for low- and moderate-income people. The 2017 tax law was heavily tilted toward the wealthiest households and profitable corporations instead of working families. And even its highly touted increase in the CTC provided zero or only a token amount (ranging from $1 to $75) to 11 million children in low-income working families because their incomes were too low.

A landmark bill in Congress offers a promising path forward. The Working Families Tax Relief Act, introduced in the Senate by Senators Sherrod Brown, Michael Bennet, Richard Durbin, and Ron Wyden with more than 40 co-sponsors, would significantly strengthen the EITC and CTC. These expansions would make 46 million households more financially secure and benefit 114 million people — including 49 million children. Families of all races would benefit, including 24 million white families, 9 million Latino families, 8 million Black families, and 2 million Asian American families.

The bill would build on the EITC’s success among families with children, boosting their credit by roughly 25%. And it would substantially improve the credit for low-wage working people without children at home. It would raise their maximum credit (from roughly $530 to $2,100), raise the income limit to qualify for the credit (from about $16,000 for a single individual to about $25,000), and expand the age range of workers eligible for the credit (from 25-64 to 19-67). The above-mentioned cashier would see her EITC rise from $172 to $1,797, lifting her $662 above the poverty line.

The bill would also make big improvements in the Child Tax Credit.  As discussed above, the current credit partly or entirely leaves out many poor families with children because they earn to little. The bill would make the CTC available to all poor families – and not dependent on earnings — and expand the credit for children under age 6. Almost all low- and middle-income families with children would receive a $2,000 Child Tax Credit for each child age 6 or older and $3,000 per child under 6.

The larger tax credit for young children would help respond to the special economic challenges that families with young children can face.  Parents in these families tend to have lower wages because they are often less advanced in their careers, and the high cost of child care for young children can force many parents to choose between paying that expense or getting by on just one income.

To better target the Child Tax Credit to families who need it most, the bill would also begin phasing the credit down for married couples with incomes over $200,000 (compared to $400,000 under current law) and single parents with incomes over $150,000 (compared to $200,000).

Putting its EITC and CTC expansions together, the bill would make a substantial difference for low- and moderate-income working families. A single mother of two earning $20,000 would get a $3,700 increase, for example, while a married couple with two young kids making $45,000 would get a $3,500 increase. The bill would cut child poverty by 28%, lifting 3.1 million children out of poverty and making another 7.7 million children less poor.

The bill would also have lasting benefits for children, helping not only them but our country as a whole.  Studies show that kids in low-income families that receive added income from working-family tax credits like the EITC and Child Tax Credit do better in school and are likelier to attend college. They also are likelier to earn more as adults due to their higher skills and more years of education. And, kids whose families receive working-family tax credits are likelier to avoid the early onset of illnesses associated with child poverty, further boosting their earnings ability.

“Both the EITC and Child Tax Credit have made a huge difference for our family and have been critically important to our financial stability as parents of young children,” Kathleen from Utah explains.

That’s a key message for policymakers as they debate ways to reduce inequality and restructure the 2017 tax law to expand opportunity for low-wage working families. Strengthening the Earned Income Tax Credit and Child Tax Credit would advance both of those goals.

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities (CBPP). CBPP is a nonpartisan research and policy institute founded in 1981 to analyze federal budget priorities, with a particular focus on how budget choices affect low-income Americans. CBPP pursues both federal and state policies designed to reduce poverty and inequality and to restore fiscal responsibility in equitable and effective ways. Learn more at www.cbpp.org.

Special thanks to MomsRising for sharing the stories from people and families across the country who receive the Earned Income Tax Credit and Child Tax Credit.

This story was originally published in the July 2019 issue of Connection magazine. Read the full issue.