Catastrophe - Dick Morris [21]
But then in 1986, in the days of Ronald Reagan, Washington developed a new policy: the refundable tax credit.
Reagan wanted people who worked full-time and couldn’t work their way out of poverty to be able to get a hand up. He distinguished this hand up from the handouts given to welfare mothers who did not work. To the Gipper and his Republican followers, those who worked deserved our compassion more than those who didn’t.
So Reagan decided that everyone who worked full-time but whose household size was such that they were still impoverished on payday, would get a credit against their income taxes—even if that meant that they didn’t pay any taxes.
But even a full exemption from taxes wasn’t enough for many of the workers Reagan wanted to help. They made so little that even being relieved of the need to pay income taxes didn’t make enough difference to get them out of poverty. So Reagan decided to make the tax credit “refundable.”
Of course, it was a “refund” in name only. Those who got the assistance weren’t really getting back money they paid. They were getting these “refund” checks even though they hadn’t paid any taxes to begin with.
This was called the Earned Income Tax Credit. Congress loved the EITC, and under President Clinton it expanded it dramatically. In 1993–1994, Clinton—who had pledged to “end welfare as we know it” during his campaign—persuaded the Democratic Congress to beef up the EITC and offer its benefits to people making as much as $25,000 a year or more. If their families were sufficiently large that even this income meant they lived in poverty, they would get a refund. No longer would anyone go to work at a full-time job and come home poor!
As a result, more than 20 million Americans now receive EITC payments averaging more than $1,900 each.65
In 2000, George W. Bush was elected president—swept into office in part by a popular mandate to cut taxes. But during the campaign he had been roughed up by his Democratic opponent, Vice President Al Gore, who said that Bush would only cut taxes for the rich while doing nothing to help the middle class. Gore noted that Ronald Reagan, the ultimate Republican tax cutter, had actually increased income taxes on the middle class, raising the bottom-bracket income tax rate from 11 percent to 15 percent as he was cutting the top levy from 50 percent all the way down to 28 percent.66
Gore warned that Republicans only wanted to cut taxes for the rich and would do nothing to help the average person.
But Bush had gotten elected as a “compassionate conservative” he was determined to help the poor and middle class, as well as the rich, with his tax cuts. Between 2001 and 2003, the Bush administration instituted a federal tax cut for all taxpayers. Among other changes, the lowest income tax rate was lowered from 15 percent to 10 percent, the 27 percent rate went to 25 percent, the 30 percent rate went to 28 percent, the 35 percent rate went to 33 percent, and the top marginal tax rate went from 39.6 percent to 35 percent.67
Still Democrats pressed for more tax cuts for the bottom of the spectrum. How, they asked, can we help those who earn so little that they pay no income tax at all? By definition, tax cuts would offer them no assistance. Unless Bush made an effort to help them, his tax cuts could still be skewered by partisan opponents as a giveaway to the rich.
So President Bush and Congress passed a refundable tax credit of $1,000 per child for every taxpayer who earned less than $55,000 ($110,000 for a couple) and had children under the age of eighteen living at home.68 And if he or she paid no taxes because his or her income was too low, he or she would receive a check. Ninety percent of the parents in the United States are eligible for the Child Tax Credit; in 2005, it led to $14.6 billion in payments or credits to families.69
With the refundable tax credit, Bush was able to argue that a fair share of his tax cuts were going to the poor and the lower middle class, not just to