Making Taxes and Welfare Work Together

Law and Society AssociationPanel on Thinking Big About Tax Policy

Denver, ColoradoMay 30, 2009

by Jon FormanAlfred P. Murrah Professor of Law

University of Oklahomajforman@ou.edu

Income Inequality

 Gini

coefficientInterdecile ratio

P90/P10Interdecile ratio

P50/P10Level Rank Level Rank Level Rank

Australia 0.30 16 3.95 15 2.09 18Canada 0.32 18 4.12 17 2.14 20Mexico 0.47 30 8.53 30 2.86 30Sweden 0.23 2 2.79 2 1.72 1United Kingdom 0.34 23 4.21 18 1.99 15United States 0.38 27 5.91 27 2.69 29OECD-30 0.31 .. 4.16 2.09 ..

2http://dx.doi.org/10.1787/420888675468

Income Inequality, cont.Interquintile share ratio

(S80/S20)Interdecile ratio

(P90/P10)Australia 4.8 4.0Canada 5.2 4.1Mexico 12.1 8.5Sweden 3.3 2.8United Kingdom 5.4 4.2United States 7.9 5.9OECD-30 5.3 4.1

3http://dx.doi.org/10.1787/421061637532

Inequality and Redistribution

CountryGini

Before Gini

After

Poverty Before

(50% of median

income)

Poverty After

(50% of median

income)

Tax %GD

P

Social Spending

%GDP

Australia 0.46 0.3 28.6 12.4 30.6 17.1

Canada 0.44 0.32 23.1 12 33.3 16.5

Mexico n/a 0.47 21 18.4 20.6 7

Sweden 0.43 0.23 26.7 5.3 49.1 29.4

United Kingdom 0.46 0.34 26.3 8.3 37.1 21.3

United States 0.46 0.38 26.3 17.1 28 15.9

OECD 0.45 0.31 26.4 10.6 35.9 20.5

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Inequality and Child Poverty in Selected Countries

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Social Spending and Child Poverty in Selected Countries

Redistribution through Cash Transfers & Taxes

Transfers to lowest quintile

Taxes from lowest quintile

Net transfers to lowest quintile

Australia 5.9 0.2 5.8Canada 3.5 0.6 2.9Korea 0.9 0.5 0.4Sweden 8.5 2.8 5.7United Kingdom 4.6 0.4 4.1United States 2.3 0.4 1.9OECD-23 5.4 1.2 4.2

7http://dx.doi.org/10.1787/422058728151

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“Making Work Pay” Credit New refundable credit I.R.C. § 36A (ARRA §1001) Will cut taxes for working families Up to $400 ($800 if MFJ)

Computed as 6.2 percent of earned income up to $400 ($800 if MFJ)

Phase out for taxpayers with modified AGI > $75,000 ($150,000 MFJ)

Claim credit on 2009 tax return Tax withholding decrease

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Earned Income Tax Credit (EITC) Increase New credit percentage for 3 or more

qualifying children I.R.C. § 32 (ARRA § 2002) Temporary increase 2009 & 2010 Computed as 45% of earnings (up from

40%) Maximum credit increase = $5,028 to

$5,657 Maximum AGI increase = $43,415 to

$48,279

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Child Tax Credit

$1,000 per qualifying child I.R.C. § 24 (ARRA § 1003)

Temporary expansion of eligibility for refundable credit

More lower income families qualify: 2008 – threshold amount was = $8,500 2009 – threshold amount = $3,000 2010 – threshold amount = $3,000

Poverty Levels and Net Federal Tax Thresholds, 2009

Unmarried individual

Single parent with 1 child

Married couple with 2

children

Married couple with 3

children1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Simple income tax threshold (before credits)

$9,350 $15,650 $26,000 $29,650

3. Income tax threshold after credits

$13,391 $32,317 $50,233 $60,550

4. Employee payroll tax threshold

$0 $0 $0 $0

5. Combined income and payroll tax threshold

$9,336 $25,667 $38,592 $43,743

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Taxes at Poverty Level, 2009

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Unmarried individual

Single parent with 1 child

Married couple with 2

children

Married couple with 3

children1. Poverty levels $10,830 $14,570 $22,050 $25,7902. Income tax at poverty level (after credits)

-$452 -$4,443 -$7,695 -$8,537

3. Employee Social Security & Medicare tax at poverty level

$829 $1,115 $1,687 $1,973

4. Combined income and payroll tax at poverty level

$377 -$3,328 -$6,008 -$6,564

5. Combined tax as a percent of income at poverty level

3.5% -22.8% -27.2% -25.5%

U.S.: Share of Household Income & Gini Index, 2005

Market income Disposable income

Quintiles

Lowest 1.50 4.42

Second 7.26 9.86

Middle 14.00 15.33

Fourth 23.41 23.11

Highest 53.83 47.28

Gini Index 0.493 0.418

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Canada

Canada Child Tax Benefit (CCTB) monthly payment to families w/ children

Universal Child Care Benefit (UCCB) $1,200 per year for children under 6

Working Income Tax Benefit (WITB) refundable tax credit of 25% of earned

income in excess of $3,000, maximum of $925 for individuals ($1,680

for single parents and couples)15

United Kingdom

Child Benefit £20/week oldest child; £13.20 others

Child Tax Credit £545 per year/family+ £2,235/child

Working Tax Credit £1,890 per year per worker + 80% × child care, up to £175/week for

1 child; £300/week for 2+ children

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Australia

Family Tax Benefit Part A: $4,631.85 child under 13;

$5,818.40 child 13-15; etc. Part B: extra help for low-income single

parents & families with one main income

Child Care Tax Rebate Baby Bonus

$5,000 ($384 every fortnight for 6 months)

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Dependent Exemption(since 1917; $3,650 in 2009)

18Roberton Williams, Federal Taxes and Children (Urban Institute, April 16, 2009), Figure 1, http://www.taxpolicycenter.org/events/upload/Thurs-Child-handouts-large.pdf.

About the Author Jonathan Barry Forman (“Jon”) is the Alfred P.

Murrah Professor of Law at the University of Oklahoma College of Law, where he teaches courses on tax and pension law.

Professor Forman is also Vice Chair of the Board of Trustees of the Oklahoma Public Employees Retirement System (OPERS) and the author of Making America Work (Washington, DC: Urban Institute Press, 2006).

Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan and master’s degrees in economics and psychology.

Jon can be reached at jforman@ou.edu, 405-325-4779 These slides at www.law.ou.edu/faculty/forman.shtml

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