President Obama's Progressive Tax Initiatives

When President Obama rolled out his Fiscal Year 2011 budget in early February, many focused attention on the potential negative effects of the administration's proposed three-year freeze on non-security discretionary spending. Moreover, the possible effects of the president’s hawkish rhetoric toward the federal budget deficit dismayed those in the progressive community who are concerned with social equity. However, a detailed examination of the tax section of the president's budget reveals several progressive proposals designed to aid in the fight against poverty and bolster the middle class.

While media attention on President Obama’s proposed tax cuts, or tax expenditures, has focused on the extension of certain small business or green industry credits, many of the proposed tax reductions benefit low- and moderate-income people. These include temporary extensions of certain measures of the American Recovery and Reinvestment Act of 2009 (Recovery Act) and the modification of existing tax expenditures.

Proposed extensions of a pair of Recovery Act tax credits would be vital for working families and families that have fallen victim to the dismal economy. The first is a temporary extension of the Making Work Pay (MWP) credit. A temporary provision of the Recovery Act slated to expire at the end of 2010, the MWP credit provides a refundable income tax credit of up to $400 for individuals and $800 for married couples making less than $75,000 and $150,000 a year, respectively. The government quickly phases out the credit for those making more than the top limit. Those eligible receive the credit through reduced withholdings from their employers, which means that most of the money goes into the pockets of low- and middle-income families right away rather than after the end of the tax year. President Obama has proposed extending the provision through calendar year 2011 at a cost of roughly $61 billion.

The second provision of the Recovery Act that the White House has proposed extending is COBRA premium assistance. COBRA requires certain employers to offer former employees the opportunity to pay for continued coverage provided under the employers' group health plan. The Recovery Act provided COBRA-eligible recipients that lost their jobs during the height of the recession with a reduced premium rate of 35 percent while allowing employers a credit against payroll taxes for the remaining 65 percent of the premium. The assistance is currently available for 15 months. COBRA is often the only choice for families to retain health coverage after a head-of-household loses his or her job, but the coverage rates can be too expensive. The rate assistance under the Recovery Act has helped many distressed families retain needed health insurance at a lower cost. At a cost of roughly $5.5 billion, the Obama administration is proposing that all COBRA-eligible employees that lose their jobs up through 2011 qualify for the reduced rate for 12 months.

Of the proposals to modify existing tax expenditures, three also merit remark. The first is a $15 billion expansion (over ten years) of the Earned Income Tax Credit (EITC) for families with three or more children. Enacted in 1975 and expanded dramatically under the Clinton administration, the EITC provides low- and moderate-income working people with a refundable income tax credit based on the individual's income, marital status, and number of children. For 2010, the maximum credit for families with three or more children is $630 higher than the maximum for those with one or two children, and, due to a provision in the Recovery Act, the phase-in rate – where each additional dollar of earned income results in a larger credit – for three-child families is higher. By encouraging and rewarding work, the EITC has been one of the most successful anti-poverty measures in history and has lifted more children in working families out of poverty than any other single program.

The second existing tax expenditure that the White House has proposed modifying that would provide much-needed support to low- and moderate-income families is the child and dependent care tax credit. The child and dependent care tax credit allows families to deduct up to 35 percent of up to $3,000 in eligible childcare expenses for one child and up to $6,000 for two or more children. Currently, the tax credit begins to phase out for families making more than $15,000 a year and provides no benefit for those making more than $43,000 a year. The president has proposed raising the phase-out point from $15,000 to $85,000 a year and has proposed indexing the credit for inflation, which would prevent time from eating away at the benefits of the tax expenditure. This modification would cost roughly $12.5 billion over 10 years.

Lastly, President Obama proposes to maintain the 10 percent tax bracket, which was enacted with the Bush tax cuts of 2001. This lowest bracket applies to those earning less than $7,000 ($14,000 for married couples). The 10 percent bracket, however, also keeps a portion of all workers’ incomes from being taxed at higher rates. Obama would also extend lower tax rates currently in effect for other working families (those earning less than $200,000 per year).

The White House plans to offset the costs of these proposals through the modification and cessation of several other tax expenditures, including a Financial Crisis Responsibility Fee on financial institutions, reforms of the international tax system, elimination of certain oil and gas subsides, and expiration of the 2001 and 2003 Bush tax cuts for the wealthiest of Americans, those making more than $250,000 per year. According to calculations from the White House, the above provisions would generate over the course of 10 years $90 billion, $122 billion, $39 billion, and $969 billion, respectively. While some of these revenue raisers seem less than likely to pass Congress, especially the Financial Crisis Responsibility Fee, the use of savings from closing loopholes for the oil and gas industry, cracking down on overseas tax avoiders, and raising taxes on the wealthy to provide benefits to low- and moderate-income families makes the president's budget that much more progressive.

Despite the salutary effects of the Recovery Act, unemployment and underemployment continue to plague millions of families, and most economists believe that the situation will continue for several years. Although the president’s proposed spending freeze will not help families struggling through this bleak economy, an expansion of the tax expenditures noted here can mitigate their plight.

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