Republicans are having a hard time getting traction on the idea that it is wrong to increase refundable child tax credits to families with no income tax liability. It's not a question of being stingy-many are genuinely concerned about the growth of a non-taxpaying class that potentially can vote subsidies for itself under the guise of tax reduction. In practice, however, this is less of a problem than it appears.
In truth, Republicans have no one but themselves to blame for the mess they have gotten into. It was they who invented the first refundable tax credit, the Earned Income Tax Credit (EITC), back in the 1970s. And it was Republicans who invented the child credit in the 1990s. Both were bad ideas that have come back to haunt them.
The EITC has a sterling Republican heritage. It was first instituted in the 1920s by a Republican Congress at the instigation of Treasury Secretary Andrew Mellon. Repealed in 1943, Republican President Gerald Ford revived it in 1975. In part, Ford was responding to the argument for a negative income tax that had been advanced by free-market economist Milton Friedman.
Advocates of the EITC in the 1970s made two principal arguments. First, rising payroll taxes meant that many low-income workers now paid more of these taxes than they paid in income taxes. But it was impractical to cut their payroll taxes because there was a strong tradition of having a single tax rate that every worker paid on the first dollar of earnings. Supporters of Social Security viewed this as essential to the structure of the system, so that workers would view the money withheld as a "contribution" rather than a tax. Moreover, Social Security's finances were precarious in 1975, having required a big tax increase just two years earlier.
Second, EITC supporters argued that because the credit would be available only to those with earned income, it would reinforce work incentives and help get people off welfare. By making the credit refundable, it would offset the disincentive effects of higher payroll tax rates, which had risen from 4.8 percent on workers and employers in 1970 to 5.85 percent in 1975. The legislative history makes clear that Congress and the White House both viewed the EITC as a de facto payroll tax cut, not a welfare program.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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