Collins/Snowe Vote to Increase Marginal Tax Rate

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Collins/Snowe Vote to Increase Marginal Tax Rate

National Center for Policy Analysis
DAILY POLICY DIGEST
Monday, June 9, 2003
CHILD CREDIT INCREASES MARGINAL TAX RATESThe increased child credit in the just-enacted tax bill is not
refundable to people who don't pay income taxes. However, last
week the Senate voted to extend the child tax credit to
nontaxpayers. As a trade-off with Democrats, Senate Finance
Chairman Chuck Grassley (R-Iowa) insisted on giving the $1,000
tax credit to more higher-income families. The unintended consequence of this stretched-out phaseout at
higher income levels is an increase in marginal tax rates that
"all but wipes out the just-passed Bush tax cuts for these
taxpayers," says the Wall Street Journal. o Marginal tax rates are raised because the phaseout in the
per child tax credit reduces its value by about $50 for
each $1,000 of rising income. o This raises marginal tax rates for taxpayers in the
phaseout range by about five-percentage points until the
tax credit is gone, according to Steve Entin of the
Institute for Research on the Economics of Taxation.The couples subject to this phaseout were mostly in the old 27
percent and 30 percent tax brackets, now down to 25 percent and
28 percent under the Bush tax rate cuts. But the phaseout will
push their actual marginal rates back up to 30 percent and 33
percent. o In the Bush tax cut, the $1,000 credit starts to phase out
for couples making more than $110,000 until it goes to
zero at about $150,000. o Grassley's bill raises that starting phaseout income level
later in this decade to $150,000 before going to zero
somewhere approaching $200,000.Marginal tax rates matter because they affect decisions to work,
save and invest. Taxpayers confronted with the phaseout will
actually have less incentive to produce more income than they did
before the Bush cuts.Source: Editorial, "Grassley Incentive Killer," Wall Street
Journal, June 9, 2003.For text
[url=http://online.wsj.com/article/0,,SB105512894354295800,00.html]http://onl...For more on Tax Credits
[url=http://www.ncpa.org/iss/tax/]http://www.ncpa.org/iss/tax/[/url]
----------Wall Street Journal
June 9, 2003 REVIEW & OUTLOOK
Grassley Incentive KillerSenate Republicans are chagrined for giving in last week to Democratic demands to extend the child-care tax credit to people who don't pay income taxes. They should be embarrassed, but it's even worse than that: They also voted to raise marginal tax rates on more of their own voters.As political routs go, this was Belgium without the backbone. [b]After two weeks of Democratic pounding, and GOP silence, the Senate expanded the "refundable" tax credit by a vote of 94-2[/b]. We salute the two, Oklahoma Republicans Don Nickles and Jim Inhofe, for pointing out that a refundable credit isn't a tax cut but a welfare check -- one more transfer payment from taxpayers to non-taxpayers.But the policy defeat is even greater than that in the "compromise" agreed to by Senate Finance Chairman Chuck Grassley. In return for accepting the Democrats' demand, Mr. Grassley insisted on giving the $1,000 tax credit to more higher-income families. This sounds OK at first glance, but the fine print reveals an increase in marginal tax rates that all but wipes out the just-passed Bush tax cuts for these taxpayers.This perverse twist occurs because of the "phase-out" in the per child tax credit. Under the phase-out, the value of the credit declines by about $50 for each $1,000 of rising income. According to math done by Steve Entin of the Institute for Research on the Economics of Taxation, this ends up raising the marginal tax rate for these taxpayers by about five-percentage points until the tax credit is gone.Couples subject to this phase-out were mostly in the old 27% and 30% tax brackets, now down to 25% and 28% under the Bush cut in rates. But the tax credit phase-out will push their actual marginal rates back up to 30% and 33%. This matters because it is at the margin that tax cuts affect decisions to work, save and invest. The taxpayers who confront the phase-out will actually have less incentive to produce more income than they did before the Bush cuts.Senator Grassley's contribution was to apply this marginal-rate hammer to even more people in higher tax brackets. In the Bush tax cut, the $1,000 credit starts to phase-out for couples making more than $110,000 until it goes to zero at about $150,000. Mr. Grassley's bill raises that starting phase-out income level later in this decade to $150,000 before going to zero somewhere approaching $200,000.[b]As a political matter, this means that Mr. Grassley traded handouts to low-income Americans, who tend to vote Democratic, in return for higher tax rates on more affluent taxpayers who tend to vote Republican[/b]. There's a word for this, and it isn't "genius."[b]The lesson for Republicans is that this is what comes from dabbling with "tax credits" and other non-marginal tax policy[/b]. They are essentially handouts that amount to acts of political favoritism, but they don't improve economic incentives. If Republicans are going to agree to tax credits at all, they should at least make them universal so that there is no phase-out and thus no marginal rate leap.The irony is that Mr. Bush knows all of this. During the 2000 campaign, his advisers went to great lengths to devise a tax cut that wouldn't raise the marginal rate on any taxpayers, including lower-income earners who are hurt by the phase-out of the earned income tax credit. It'd only help these taxpayers, and the economy, if the White House recalled those earlier days and decided to oppose the Grassley incentive killer.URL for this article:
[url=http://online.wsj.com/article/0,,SB105512894354295800,00.html]http://onl...
Copyright 2003 Dow Jones & Company, Inc. All Rights ReservedFor information about subscribing go to [url=http://www.wsj.com]http://www.wsj.com[/url][ 06-09-2003: Message edited by: Editor ]

Melvin Udall
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Wow! Where would we all be if they weren't watching out for us?BTW, One of Senator Snowe's representatives will be at the Brunswick Town Republican Committee meeting tomorrow night to "explain her votes." Should be "enlightening." Anyone who'd like to come, you are welcome. Let me know, and I'll provide details.

Martin
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Great idea!!You bring the tarI'll bring the feathers!

James
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Melvin, I have an agenda item coming up on the issue of these votes. Where and when is this months meeting?

Anonymous
Re: Collins/Snowe Vote to Increase Marginal Tax Rate

James:Are you talking about the County meeting? It is on the 17th, but I don't know where.I will be supporting you.Tony

Melvin Udall
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

At the new Brunswick High School on Maquoit Road, around back in the Cafeteria. Coffee at 6:30, formal meeting at 7pm.

James
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Yep, I'd heard it was in Brunswick this month but have no details.Should be an interesting meeting. Even if I don't get the votes, the discussion is worth while.

Steven Scharf
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Melvin is talking about the town committee meeting, James is talking about the county committee meeting. Both of which will be in Brunswick.Steven Scharf
97 Grant Street, 2nd Floor
Portland, Maine 04101
Tel: 207-774-9393
Fax: 207-774-1819
SCSMedia@aol.com

James
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Thanks Steve, I was getting flustered.

mirgliP
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

quote:Mr. Grassley's bill raises that starting phase-out income level later in this decade to $150,000 before going to zero somewhere approaching $200,000.

Note, "later in this decade". When was the last time that tax policy passed in one year was maintained for a decade. Everyone in congress has already agreed that letting the sunset provisions take effect will be unacceptable. When they don't Grassely will have handed those with incomes from 100K to 150K a gift, as he has now until "later in the decade".The other lesson is not to use gimmicks like sunset provisions to camoflage a giant tax cut as a small one.

Melvin Udall
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

Sorry for the confusion on meetings. Right; Snowe's aide will be there tomorrow for the town meeting.County meeting is in Brunswick this month on the 17th at the Methodist Church on Church Road (Right turn at the signal with Dunkin Donuts just beyond Bodwell Auto Dealership; it's the first signal coming into town from the south when you exit at 22 off 95.

Doug Thomas
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Re: Collins/Snowe Vote to Increase Marginal Tax Rate

How is it a "gift" when the person receiving worked and earned the money?How do you cut someone's taxes when they don't pay taxes?Is this an example of a lie told loud enough, and often enough becomes the truth?[ 06-09-2003: Message edited by: Doug Thomas ]

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