The
tax code has always contained provisions that reduce the income tax
burden for low-income workers, such as the standard deduction, personal
exemption, and dependent exemption. Between 1950 and 1990, the
percentage of tax filers whose entire tax liability was wiped out by
these provisions averaged 21 percent. Since then, lawmakers have
expanded credits—such as the earned income tax credit (EITC)—while
creating a plethora of new credits, including the child tax credit, the
HOPE credit, lifetime learning credit, and the credit for adoption
expenses.
Most tax credits can only reduce a taxpayer's amount
due to zero, but the EITC and the child tax credit were also made
refundable, meaning that taxpayers are eligible to receive a check even
if they have paid no income tax during the year. Those tax returns have
become, in effect, a claim form for a subsidy delivered through the tax
system rather than a direct payment from a traditional government
program like welfare or farm supports.
As shown in Table 1
below, the Tax Foundation estimates that there will be 47 million tax
returns with zero income tax liability in 2009 under current law.
That's one-third of all tax returns, and those 47 million tax returns
represent 96 million individuals.
Both the McCain and Obama
plans would increase this number by expanding existing tax benefits or
creating new ones. Senator McCain is proposing one expanded
provision—the dependent exemption—and one new credit, a $5,000
refundable health care tax credit. The Obama plan contains seven new
provisions, including a new "Making Work Pay Credit," a "Universal
Mortgage Credit," and a plan to eliminate income taxes for seniors
earning under $50,000.1
Taken together, the Tax
Foundation estimates the McCain proposals would increase the number of
nonpayers by about 15 million, bringing the total number of taxpayers
who pay no personal income taxes to 62 million, roughly 43 percent of
all tax filers. Almost all of this is due to McCain's health care
credit, which dramatically realigns health care incentives and gives
people a powerful motive to buy health insurance. This tax provision
has a bigger impact on cutting people's taxes than any single proposal
from either party.2