Policy: Budgets & Deficits

White House touts tax cuts in its budget

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Ahead of Tuesday's release of President Obama's budget request for fiscal year 2015, the White House is drawing attention to the tax cuts that will be included in the plan.

The White House announced Monday evening that the budget will include an expansion of the Earned Income Tax Credit and the Child Tax Credit, as well as other tax changes to aid college students and help promote retirement savings.

Although the White House did not specify the budgetary cost of its proposed programs, it said in a release that the tax breaks would be offset in the budget by raising taxes on certain high-income earners.

The administration has offered hints to the effect that its budget this year, an election year, will focus more on proposals geared toward its Democratic base, and less on achieving debt reductions that have become less urgently needed.

The main feature of the White House's plan would be to make permanent the expansion of the EITC to families with three or more children from the 2009 stimulus, and to increase the tax break even further by expanding it for childless workers.

The EITC is intended to aid poor people while also encouraging work. It is a refundable tax credit that accrues to low-wage workers, phasing out with income. At a cost of $58 billion in 2013, it also does more than cash welfare to lift Americans out of poverty.

The EITC is also thought of as an alternative to the minimum wage that doesn't have the negative employment effect that a minimum wage does. Nevertheless, it's politically more difficult to increase than the minimum wage because taxpayers, not businesses, foot the bill.

Obama would boost the EITC by increasing the size of the credit for workers without children. Currently, according to a report on the EITC released by the White House alongside the announcement, the maximum credit for childless workers is about $500, and a single worker with income at the poverty line qualifies for less than $200.

Arguing that the EITC would encourage work for childless workers in the same way that it does for single parents, the White House would double the maximum benefit to $1,000 and have it phase out at higher income levels.

Increasing the EITC is an idea with support across the ideological spectrum among experts. And some GOP officials have expressed support for the idea. In a recent speech on poverty policy, Florida Sen. Marco Rubio, a conservative Republican, advocated a "federal wage enhancement" that would be similar to the EITC, but managed differently to cut down on fraud.

Fraud is a major problem with the EITC. A 2013 Treasury inspector general report found that up to a quarter of EITC payments in 2012 were improper.

Other Republicans have raised separate issues with the program. A report on the welfare system released earlier in the day by House Budget Committee Chairman Paul Ryan, R-Wis., noted that the EITC has increased employment for single mothers, but pointed to studies showing that it is "less effective at increasing hours worked."

Separately, a tax code overhaul proposed by House Ways and Means Committee Chairman Dave Camp, R-Mich., last week would scale back the EITC and implement it through the payroll tax.

The White House budget is not expected to be taken up by Congress, which already set spending levels for 2015 in the deal hammered out in December by Ryan and Democratic Sen. Patty Murray of Washington.

It would pay for the expansion of the EITC, child tax credit, and various incentives for promoting college by closing what the White House identified as two loopholes.

One would be the "carried interest loophole," a feature of the tax code that results in certain investment managers' earnings being taxed at the rate of capital gains, rather than as ordinary income.

The other is sometimes referred to as the "Gingrich-Edwards" loophole (the White House identified it simply as the "Gingrich" provision). It allows some professionals with their own companies to avoid payroll taxes by structuring their income as distributions from a pass-through business.

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