[Congressional Record Volume 142, Number 117 (Friday, August 2, 1996)]
[Extensions of Remarks]
[Pages E1502-E1503]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  INTEGRATING THE $500-PER-CHILD CREDIT WITH THE EITC TO IMPROVE BOTH

                                 ______
                                 

                          HON. THOMAS E. PETRI

                              of wisconsin

                    in the house of representatives

                         Friday, August 2, 1996

  Mr. PETRI. Mr. Speaker, yesterday I introduced legislation to create 
one seamless system of tax breaks for families with children, combining 
the best aspects of the earned income tax credit, and the proposed 
$500-per-

[[Page E1503]]

child credit. My bill will begin to alleviate the problems related to 
the current EITC such as the marriage tax penalty, the lack of 
additional help to low-income families with more than two children and 
especially the high marginal tax rates in the phaseout range. It will 
give families with children a tax break just as was the intent of the 
$500-per-child credit but will do so in a more equitable way with most 
of the benefits targeted to the lower half of the income scale.
  I ask that a description of the bill and a copy of a letter from the 
Joint Committee on Taxation scoring my bill be printed in the Record.

  Integrating the $500-Per-Child Credit With the EITC To Improve Both

       Problems to be solved:
       1. Current earned income tax credit (EITC)--a vital adjunct 
     to welfare reform because it enables low-skilled people with 
     kids to support themselves by working--has 3 big flaws:
       a. contains high marginal tax rates (21% or 16%) during 
     phaseout--when combined with other taxes and phaseouts (i.e. 
     food stamps, housing subsidies, and a possible medicaid 
     voucher), removes any incentive to get ahead because total 
     marginal tax rate can top 100%;
       b. contains high marriage penalties ($6018 + $750 income 
     tax penalty in extreme case this year);
       c. provides no extra help to larger families with greatest 
     need.
       2. $500 per child tax credit in Balanced Budget Act (BBA) 
     was skewed toward upper half of income distribution because 
     it wasn't refundable. Almost half of all children wouldn't 
     get full credit, including all in 2 parent families below 
     following income thresholds (single parent thresholds are 
     each $3350 lower, but they are more likely to take full 
     dependent care credit):

------------------------------------------------------------------------
                                                    With no    With full
                                                   dependent   dependent
                                                     care        care   
                                                    credit      credit  
------------------------------------------------------------------------
1 child.........................................     $17,684     $21,524
2 children......................................      23,567      29,967
3 children......................................      29,450      35,850
4 children......................................      35,333      41,733
5 children......................................      41,216      47,616
6 children......................................      47,099      53,499
7 children......................................      52,982      59,382
8 children......................................      58,865      65,265
------------------------------------------------------------------------

       At same time, EITC cuts in BBA hit families hard in upper 
     'teens and 20's. Example: couple with 2 kids, $25,000 income, 
     and no dependent care credit gets full $1000 child credit but 
     loses $642 of EITC, for net tax cut of only $358.
       Solution:
       1. For kids under 18, eliminate personal exemption ($2550 
     in '96) and substitute $1000 credit--provides net tax cuts 
     per child as follows:
       15% bracket (about 0 to $40K taxable 1996 joint return 
     income)--$618.
       28% bracket (about 40K to 97K taxable 1996 joint return 
     income)--$286.
       Upper brackets--credit phases down to same value as a 
     personal exemption for AGIs above $110,000 (joint) & $75,000 
     (household head), thereby providing no tax cut for families 
     above those thresholds.
       2. Universal $1000 credit is refundable for those with 
     earned income and substitutes for a major portion of the 
     EITC--NO PHASEOUT NECESSARY BECAUSE EVERYONE GETS IT. Provide 
     extra EITC to PARENTS--maximum of $1665 for couples and net 
     of $1267 for single parents (due to their lowered tax 
     threshold), phased out at 10% for couples and 11% for single 
     parents.
       Advantages:
       1. Costs $11 billion less than $500 credit + EITC cuts in 
     '97 Budget Res.;
       2. Tax cut is progressive;
       3. Credit itself is doubled;
       4. Maximum EITC marriage penalty cut from $6018 to $2770 in 
     '96 & more later;
       5. EITC marginal tax (i.e. phaseout) rates cut from 16% & 
     21% (current law) or 34% (BBA conference report maximum) to 
     10 and 11%;
       6. Provides extra $618 per child for WORKING poor families 
     with more than two kids;
       7. Supports welfare reform in which basic income of able-
     bodied is wages plus general tax credits plus a general 
     health plan voucher.
                                                                    ____



                                  Joint Committee on Taxation,

                                    Washington, DC, June 13, 1996.
     Hon. Thomas Petri,
     House of Representatives,
     Washington, DC.
       Dear Mr. Petri: This letter is in response to your request 
     of May 22, 1996, for a revenue estimate of a proposal to 
     provide tax credits for certain families with children. The 
     proposal would change the present-law earned income tax 
     credit into a refundable parental credit and would replace 
     the personal exemption applicable to dependents under the age 
     of 18 with a refundable dependent credit.
       The new dependent credit would allow a taxpayer a credit 
     equal to 12.5 percent of earned income up to $8,000 for each 
     of two dependents under the age of 18, the credit would be 
     equal to 4 percent of earned income up to $25,000. For all 
     other dependents under the age of 18, the credit would be 
     3.33 percent of earned income up to $30,000. The maximum 
     credit would be $1,000 for each eligible dependent.
       The new parental credit would be 15 percent of earned 
     income up to $11,000 for non-joint returns. The maximum 
     credit would be $1,650. For joint returns, the parental 
     credit would be 18.5 percent of earned income up to $9,000. 
     The maximum credit would be $1,665.
       The dependent credit would be phased out in two stages. The 
     initial phasedown would reduce the credit for each dependent 
     by 5 percent of modified adjusted gross income (``AGI'') in 
     excess of $75,000 ($110,000 for joint returns) up to a 
     maximum reduction of $272. The remaining credit would be 
     phased out as is the present law dependent exemption. That 
     is, the credit would be reduced by 2 percent for every $2,500 
     or part thereof by which the taxpayer's AGI exceeds the 
     threshold amount ($118,150 for single returns, $177,250 for 
     joint returns and $147,700 for head of household returns in 
     1996).
       The parental credit would be phased out at a rate of 11 
     percent of modified AGI in excess of $11,600 for non-joint 
     returns and 10 percent of modified AGI in excess of $12,000 
     for joint returns.
       Modified AGI would be equal in AGI plus nontaxable Social 
     Security benefits, certain alimony and child support payments 
     in excess of $6,000 per year, tax-exempt interest, certain 
     nontaxable pension income and minus certain capital and 
     business losses.
       In general, the dependent credit would not be indexed. The 
     second stage phaseout level would continue to be indexed as 
     under present law.
       In the case of the parental credit, the credit percentage 
     and phaseout threshold for non-joint returns would be indexed 
     beginning in 1999 at a rate 2 percentage points lower than 
     that applicable to other tax parameters. For other returns 
     the credit percentage and phaseout threshold would be indexed 
     beginning in 1998 at a rate 1 percentage point higher than 
     the rate applicable to other tax parameters.
       This proposal, effective for taxable years beginning after 
     December 31, 1996, would have the following effect on Federal 
     fiscal year budget receipts:

                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                  Fiscal years                                                  
-----------------------------------------------------------------------------------------------------------------
                        1997                           1998      1999      2000      2001      2002    1997-2002
----------------------------------------------------------------------------------------------------------------
3.5................................................    -19.9     -18.4     -17.1     -15.9     -14.9     -89.7  
----------------------------------------------------------------------------------------------------------------
Note.--Details do not add to total due to rounding.                                                             

       I hope this information is helpful to you. If we can be of 
     further assistance in this matter, please let me know.
           Sincerely,
     Kenneth J. Kies.

                          ____________________