Comparing Tax Systems: Reconsidering Refundable Credits

When looking at the previous post comparing the effective tax rates of current system to the Fairtax system, you may have noted that there are a few examples for large 'single/head of household' very low income households where the difference between the Current System Effective Tax rate and the FairTax Effective Tax rate is negative, indicating that such households would be better off under the current system than the FairTax.

If you took the time to look closely, you would notice that in all such cases, the reason is that some combination of the current system refundable tax credits ( earned income tax credit, or additional child tax credit) were leading to a large negative income tax for that household. A refundable tax credit is a credit against taxes paid, such that if a household owes no taxes, the remaining credit will be refunded to them.

So if a household only owes $1000 in taxes, but is eligible for a $2000 refundable tax credit, the IRS would send them a check for $1000. Effectively, they would have paid -$1,000 in income taxes.

Refundable tax credits are basically anti-poverty programs. The Congressional Budget Office (CBO) even classifies them as such in their outlays for mandatory programs table. They note for the 'Income Security' category: 'Includes unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, Food Stamps, family support, child nutrition, and foster care.' This is an important point. The refundable part of these tax credits are budgeted as outlays. If we move to the FairTax, the budget for them as outlays remains. Since the FairTax is revenue neutral, the revenue for them remains (to the degree it's there now). So if we wish to spend those moneys on anti-poverty programs we are free to do so without abusing the tax system to accomplish that end.

Because of this, I felt it might be useful to see how the FairTax compares to the current system, in the absence of refundable credits. Please note, whether you believe the money currently budgeted for refundable tax credits will be spent on equivalent anti-poverty programs or not is up to you. If you don't then continue to refer to the previous comparison tables. But if you believe they will be, then the outcome for the poor looks much rosier under the FairTax than under the current system in all cases, as shown in the tables below, where the refundability of tax credits has been disabled (in other words, no one pays less that $0 income tax):

Loading table...

Loading table...

Loading table...

Loading table...