Rep. Rashida Tlaib never shies away from controversy. This time, the Michigan Democrat has introduced a proposal which would create a new middle class tax credit, which she says would increase the take-home pay of American workers.
A press release promoting the plan notes that it is “stark contrast” to the GOP’s 2017 tax cuts, which it claims “only helped shareholders and wealthy individuals.” Co-sponsor Rep. Jesús García, D-Ill., added “tax cuts should go to the communities that need it the most and [this plan] does just that.”
Tlaib’s “tax cuts” would take the form of new spending through the tax code. If implemented, the legislation would cost an estimated $380 billion in 2020, and would continue rising to adjust for inflation each year.
A recurring Democratic criticism of the GOP’s tax cuts is that most of the benefits of the tax cuts went to the wealthy, who they see as “not paying their fair share.” But due to the exceptionally progressive structure of our federal income tax system, a reduction of tax rates will necessarily have an outsized effect on those who pay the largest share of taxes. And in 2016, the latest comprehensive data available, the top 1% of earners bore over 37% of the federal income tax burden. The top half of earners paid roughly 97% of these taxes. Furthermore, 33% of filers had no income tax liability at all, up significantly from 21% in 1980.
The GOP’s tax reforms cut individual income taxes across the board and also increased the progressivity of the tax code, meaning that the wealthy now pay relatively more of the taxes than before, not less.
This is a what a tax cut actually looks like.
Meanwhile, in order to provide “tax cuts” to low- and middle-income individuals, Tlaib’s proposal relies on refundable tax credits. Whereas nonrefundable tax credits can only reduce a tax bill to zero, refundable tax credits can credit a taxpayer even once no more taxes are owed. A refundable tax credit, like the one proposed by Tlaib, would result in a negative income tax — basically, a direct cash subsidy.
Refundable tax credits have become progressive politicians’ favorite way to hand out cash subsidies. Presidential hopefuls Sens. Kamala Harris, Cory Booker, and Michael Bennet seem to be trying to outbid each other with their own versions of refundable tax credit plans pitched as “tax cuts.”
However, expansive refundable tax credits like those proposed by Tlaib would effectively serve as a welfare program operated through the tax code. And existing refundable tax credits increase compliance burdens for taxpayers and administrative costs for the IRS due to tens of billions of dollars in improper payments every year.
Attempting to draw parallels between refundable tax credits and reducing tax rates confuses the benefits and purposes of efforts like the GOP’s tax cuts. Lower tax rates allow Americans to keep more of their earned income, whereas refundable tax credits serve to subsidize some individuals at the expense of others. Rashida Tlaib should learn the difference.
Demian Brady is the director of research at the National Taxpayers’ Union, where Brandon Beyere is an associate policy analyst.
