Federal Tax Policy to Promote Broad Prosperity

August 2010

EXECUTIVE SUMMARY

• Major tax provisions from 2001 and 2003 and the American Recovery and Reinvestment Act of 2009 are set to expire by the end of this year. Congress must make decisions about the future of these federal tax policies at a time when both revenue collection and tax rates are at near-historic lows and deficits are at levels not seen since the Second World War.
• Federal tax policy generates the revenue that supports the nationwide network of public structures that allows the economy to function and grow. However, tax cuts and war funding over the past decade have driven up deficits and supplanted funding for federal investments in domestic public structures.
• The Bush tax cuts primarily benefited the wealthiest households. This year, the richest one percent of taxpayers will receive more than a third of all the benefits of those tax cuts, while those in the bottom 60 percent will get less than a fifth of the benefits. Extending the portion of the Bush income tax cuts for the wealthiest two percent will account for roughly $1 trillion in new federal debt over the next ten years.
• Allowing the Bush tax cuts for the wealthiest taxpayers to expire on time would generate enough federal revenue (approximately $40 billion in 2011) to aid small businesses directly by reducing their share of payroll taxes. Such a measure would, like extending unemployment insurance benefits or fiscal relief to states, benefit many more businesses—and do a better job of boosting the economy—than a temporary extension of the Bush tax cuts for high-income earners.
• Despite only affecting the richest estates—and at an average effective rate of 19 percent—repealing the estate tax would have a drastic impact on federal and state revenues. The combined effect of preserving the estate tax at 2009 levels and letting the Bush income tax cuts on the wealthy expire would reduce ten-year debt projections by roughly 15 percent.
• Congress must decide whether to extend or modify temporary improvements to tax credits that help low- and moderate-income working families that were made as part of last year’s American Recovery and Reinvestment Act. The Recovery Act expanded the Child Tax Credit, increased the Earned Income Tax Credit (EITC) for families with three or more children, increased marriage-penalty relief under the EITC, and created the new American Opportunity Tax Credit to help families pay for
  college.
• If the current Child Tax Credit improvements expire, 594,000 North Carolina children would lose all or some of their credit. If the EITC improvements expire, 455,000 children (213,000 filers) in North Carolina would lose some or all of their EITC benefits.
• The stability and growth of North Carolina’s future economy requires strong public structures supported by a stable and adequate tax system, thereby enabling all of North Carolina’s families to provide for their children’s development and educational achievement.