To Democrats who argue that the working poor need relief from payroll taxes, Sen. Phil Gramm (R-Texas) argues that those taxes are different because they finance future benefits--health care and pensions in their old age--to the taxpayers.
"Those are not taxes, that is social insurance," Gramm said. "No one gets better return on payroll taxes than very low-income people."
This dispute, which will play out as House and Senate negotiators try to produce a compromise between their two versions of measures to cut taxes by $85-billion over the next five years, echoes the historic arguments between the parties over the "fairness" of tax legislation. But it revolves most precisely around the nature of the federal tax liability for millions of lower-income working families.
Low-Income Families' Burden Is Payroll Tax
While upper-income Americans pay most of their federal taxes in the form of income taxes, most of these low-income working families pay little in income taxes. That's partly because working poor families already have their federal income tax liability reduced, or eliminated, by the earned income tax credit, a 20-year-old federal tax break for low-income workers.
The result is that these low-income families pay a much higher share of their total federal tax burden in the form of the payroll tax, the 7.65% levy on all wages.
That fact is at the core of the argument. House Republicans focus on families who pay federal income taxes; in their version of the bill, a family with one child could take the $500 credit only if it had an income tax liability of at least that amount.
What's more, for families receiving the earned income tax credit, the House plan would require them to subtract that benefit before determining whether they have any income-tax liability. If families owe no income tax after that calculation--and many low-income families do not--they could not receive any benefit from the children's tax credit.
That means that under the House plan, a two-parent family with two children would not benefit from the children's credit unless the family's income was more than $24,385; they would receive the credit's full benefit only with income of $27,158 or more, according to calculations by the Center on Budget and Policy Priorities.
"It's hard to give tax relief to those who have already been forgiven from the burden of paying taxes," House Ways and Means Chairman Bill Archer (R-Texas) said at a Wednesday news conference.
