On the first day of the 116th Congress (Jan. 3), Senator Kamala D. Harris (D-CA) re-introduced the LIFT [Livable Incomes for Families Today] the Middle Class Act (S.4). The legislation “provides middle class and working families with a tax credit of up to $6,000 a year—or up to $500 a month—to address the rising cost of living.”
“We need to make America’s tax code work for working people,” said Senator Harris. “Instead of more tax breaks for the top 1% and corporations, we should be lifting up millions of American families. A real tax cut for middle class families is a good place to start. That is why the LIFT the Middle Class Act is my first priority in the new Congress.”
According to the Tax Foundation, the main details of the LIFT the Middle-Class Act are:
- LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly).
- The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent.
- The credit amount and the income parameters would be adjusted each year for chained CPI-U.
- Dependent taxpayers over the age of 18 who file tax returns would also be eligible for the credit.
- Earned income would be defined as wages, net self-employment income, and Pell Grants.
- Taxpayers would no longer be eligible for the credit if they reported more than $3,850 in investment income. Investment income is defined as interest, dividends, net capital gains, and rental income.
- Taxpayers can choose whether to receive the benefit of the tax credit all at once during tax filing season or in equal monthly payments throughout the year.
The Tax Foundation estimates that Senator Harris’s proposal “would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.” Overall, “it would greatly increase the progressivity of the U.S. tax code, providing low-income taxpayers a large increase in after-tax income.”
The problem with the LIFT the Middle Class Act is not that it is a tax credit. Tax credits are always good because they result in Americans being able to keep more of their money in their pockets, wallets, purses, and bank accounts and out of the greedy hands of Uncle Sam. The problem with the LIFT the Middle Class Act is that it is a refundable tax credit.
A regular tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken.
A refundable tax credit is treated as a payment from the taxpayer like federal income tax withheld. If the “payment” is more than the tax owed after regular tax credits are applied, then the taxpayer receives a refund of money he never paid in. Refundable tax credits are the ultimate form of welfare because they are payments made in cash.
And what an incredible refundable tax credit the LIFT the Middle Class Act is! The receipt of Pell Grants, which are handouts form the government, entitles students to receive more handouts from the government.
But massive refundable tax credits are nothing new. We already have three refundable tax credits: the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC).
In fact, I suspect that deep, down inside, Kamala Harris must be a Republican.
In December of 2017, the Republican-controlled Congress passed, and President Trump signed, major tax-reform legislation, the Tax Cuts and Jobs Act (TCJA), which applies to tax year 2018. Instead of eliminating the tax code’s refundable credits (which the Republicans supported for years), the AOTC was retained as is, the refundable portion of the CTC was expanded, and EITC benefits were increased.
The AOTC is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student in each of the first four years of the student’s post-secondary education. The maximum credit is therefore $2,500. Forty percent (up to $1,000 per student) of the AOTC is refundable.
The maximum CTC is now up to $2,000 per child, of which $1,400 is refundable, up from $1,000 in previous years.
The EITC is a fully refundable tax credit for low-income working individuals, particularly those with children. The actual amount of EITC benefit depends on a recipient’s income and number of children. To be eligible, both earned income and adjusted gross income must each be less than:
$15,270 ($20,950 married filing jointly) with no qualifying children
$40,320 ($46,010 married filing jointly) with one qualifying child
$45,802 ($51,492 married filing jointly) with two qualifying children
$49,194 ($54,884 married filing jointly) with three or more qualifying children
The maximum amount of EITC that one can receive is:
$519 with no qualifying children
$3,461 with one qualifying child
$5,716 with two qualifying children
$6,431 with three or more qualifying children
Refundable tax credits are the ultimate form of welfare. Not only are they are paid in cash, the cash received is not counted as income when determining eligibility for other welfare benefits, or the amount of such benefits, from any federal welfare program or any state or local program financed in whole or in part with federal funds.
Republicans have increased and expanded refundable tax credits since they were instituted. Kamala Harris’s proposal could have just as easily come from a Republican.