Let me try to give people my first quick impression of General Clark's
Families First Tax Reform plan. I've finally had a chance to look though it and some nice dKossers were able to answer a few questions for me the other night. (Thanks to hilzoy, charlesdog12, ModerateLiberalCA, and Firefly) I was checking out some of Clark's sources he lists at the bottom of his plan, but I stopped because I was entirely underwhelmed by the proposal.
Sometimes when you are reading the Families First Tax Reform (FFTR) plan you think that he gets it, but then you come across something and have to scratch your head.
The two most successful post-war tax cutting plans, Kennedy's tax cuts and the Kemp-Roth bill, both had some common elements. They both sought to decrease the rate of taxation across all segments of the population, they both worked at the margin, and they both exchanged the lower rates for a broader tax base. (Had Kennedy had his way, they both would have cut the capital gains tax too.)
The main provisions are:
- Tax reduction. The Earned Income Tax Credit program would consolidated with other programs and extended to cover middle-class families (single or married couples with children). Those under a certain income threshhold with a certain number of children will not have to pay taxes.
Children Married Single
1 $35,000 $28,000
2 $50,000 $43,000
3 $65,000 $54,000
Currently a family can only qualify for the EITC if they don't have too much investment income (I'm not sure about what the cutoff is). Given his desire to extend the EITC to people that will definitely have more investments, I would assume this would change, but given how income, marital status, and number of children seem to be Clark's only requirements, maybe that limit would be removed (we could only hope so). Combined with low capital gains tax rates, it would most definitely cause a shift towards capital payments for work as people strived to stay under the income ceiling to avoid taxes and instead asked for investments like stock option grants for pay.
- Child Credit. The child credit will be almost doubled to $2,250. I believe the credit used to phase out at higher income levels, but Clark has removed that so now "all families, whether they make $20,000 or $50,000 or $100,000, will get the same tax break for their children."
- Tax simplification. Those families not having to pay taxes will not have to file taxes. If you earn under the wage ceiling, you will only have to fill out a three line form that asks your income, marital status, and number of children.
- Allowing the capital gains and divident tax cuts to expire. "This plan ensures that middle class families are protected from the repeal of the dividend and capital gains tax cuts."
- Tax fairness. Clark' will apply an additional 5% surcharge on income above $1,000,000. This will be in addition to the selective repeal of the Bush tax cuts on income above $200,000. I am unsure how this would change the tax rate schedule. Right now there are 6 brackets. It sounds like it would create two new brackets — 36% starting at $200,000 and 44.6% at $1,000,000 — and raise the current 35% bracket back to 39.6%. (The reinstatement of the pre-Bush tax rates above $200,000 are actually from another complimentary tax proposal by Clark. The FFTR is supposed to be revenue neutral, using the additional surtax to pay for the tax decreases in the lower brackets.)
- Closing loopholes. The proposal read: "Closing corporate tax loopholes, including ones that reward companies for shifting jobs overseas. Currently the United States provides tax breaks for companies that shift their headquarters - and their jobs - overseas. Wes Clark will crack down on these and other tax shelters, endorsing the Senate Democratic legislation to close tax loopholes that will save an average of $10 billion annually." There is really nothing more said about it, so I'm not sure about what specifics he's talking about. The report this comes from is a JCT report that I emailed somebody about last night, and hopefully she'll shed some light on it for me.
The FFTR doesn't apply across the population. My advice if Clark gets elected is to run out, get married, and have a couple kids as soon as possible. Those with no children get nothing out of it. In California, only 17% of the labor force has children, and if we use Clark's data that half of all families will not have to pay income tax, that only works out to 1 in 12, not a very broad base at all.
Two problem with the EITC has always been fraud and the marriage penalty it inflicts too, because of the structure of the benefit payout and qualification. From Robert McIntyre in The American Prospect:
The EITC also creates some horrific marriage penalties that no one has found an affordable way to solve.
But the biggest problem is how poorly the EITC is policed. Because it has become so big -- maxing out this year at $4,140 for a family with two children -- lots of people are cheating to get it. Last year, under pressure from Congress to crack down on these abuses, the IRS actually audited a higher number of EITC claimants than the combined total of all other audited individual taxpayers. Even so, that meant an EITC audit rate of only 2 percent.
A just-released Treasury study, based on in-depth audits of about 3,500 people who claimed the EITC in 1999, finds that only half of the people who took the credit were fully entitled to what they claimed -- including about 7 percent who mistakenly took too little. The other half of EITC recipients claimed, in total, $11 billion more than they should have. Apparently, about 2.8 million of the 9.3 million people who took too much merely overstated their credits a bit. But most of the cheating was by 6.5 million people who shouldn't have gotten a penny of what they claimed -- a rip-off of $10 billion. In other words, a third of the total benefits of a program designed to help low-income families with children went to people who either didn't have eligible children or made too much money -- or both.
While maybe Clark's advisors found a way around this problem in how they are planning to restructre the program, it doesn't give me much hope that the cost of the program will in any way be contained. The EITC is already the fastest growing transfer program we have. It seems like a common problem though, one that we should know by now. The EITC is an anti-poverty program, and Clark wants to extend it to be a middle-class family tax cutting program. The last time we took a transfer program intended to be an anti-poverty measure and started extended it out to cover other segments of the population, we got the Social Security problem that now plagues us. These programs were not designed for this.
While giving benefits to a small portion of the workforce, the plan concentrates the tax base too. This a a break from the previous methods of taxing at lower rates, but taxing more. Two thirds of those filing income in the top tax bracket are small businesses, they are are America's job machine, especially now as information technology and computer assistance make small businesses more powerful. What seems to be happening is a tipping of the tax burden off of families with childen and onto small business and those without children.
The FFTR does get some points for working mostly on the margins though. For all the EITC's faults, it is still one of the better programs for getting people off of welfare and working, far better than the minimum wage. My biggest concern with this though is how fast marginal rates will jump for those no longer qualifying for zero income tax rates. Does that single person with a child that got a raise to $30,000 jump in at the 25% bracket? That seems like it would create a very strong barrier against income mobility as people chose other forms of income (maybe expanded benefits or capital appreciation). However, the child tax credit is entirely non-marginal. From the point of making it easier on families, of course it helps, but it will not move the economy.
These are also the ideas behind loophole closing too. Closing some of these tax shelters of eliminating some abused deductions or credits enlarges the tax base as well as simplifying the tax code. This allows lower marginal rates to be charged. With the loophole, time and effort is expended on avoiding taxation. By closing it you redirect effort to productive causes. And the low marginal rates provide an incentive effect. The question is always "How much is that next dollar worth?"
The effectively creates two systems of taxation. Those wil kids get some greate kids and for them, I'd give the plan a 'B+', but considering they are a small part of the overall economy, overall I give the plan gets a 'C'. There were just not enough details either. The couple pages I read were filled with plenty of example, but examples are often cherry picked. With most taxation policies, the Devil is in the details, and Clark was very light on the details. I went searching for the Jeffrey Liebman citation (Jeffrey Liebman, 1/04/03, "Preliminary Estimate of the Effects of General Wesley Clark's Tax Reform Proposal.") hoping that would shed some more light on things, but I found no other references to it anywhere.
The FFTR leaves some strange one-line unexplained nuggets, like: "Wes Clark is committed to further simplifying taxes for middle-class families by reforming the taxation of capital." What does that mean?