DETAILED DESCRIPTION OF FAMILIES FIRST TAX REFORM

Benefits for Families

* Eliminating income taxes for all families of four making under $50,000. Under this plan, no family of four making under $50,000 will have to pay income taxes.

* A simple three-line form determines who pays federal income taxes. Under this plan, families will only need to fill out a simple three-line form to find out if they need to pay federal income taxes, providing their income, number of children, and marital status.

* The majority of families will not need to file tax returns. Under this reform, more than half of American families will no longer need to file tax returns. The government will withhold the correct amount of taxes from the families paycheck or provide them with the correct tax credit. If they still want to file a tax form, they can. This system has been proven to work in thirty-six countries, including the United Kingdom.¹

* Attacking poverty: 3.2 million lower-income taxpayers will be taken off the tax rolls. Professor Jeffery Liebman of Harvard's Kennedy School of Government has done estimates of the Tax Reform plan and found that it will take 3.5 million taxpayers off the tax rolls - resulting in 54 percent of working American families with children paying no income taxes.² This means, the majority of working families with children will pay no income taxes.

* Encouraging opportunity and responsibility by making work pay. Family First Tax Reform, combined with this proposal to raise the minimum wage to $7 by 2007, will raise the reward for families that work. At the same time, the new, expanded tax credits can be used to pay for transportation and childcare, enabling more families to work. Studies show that this will increase labor force participation, move families from welfare to work, and thus help the economy.

* Reduce or eliminate the marriage penalty for millions of low-income families. The 2001 tax cut ended the marriage penalty for millions of middle-class families but left a marriage penalty for low-income families. This Tax Reform will fix that injustice- reducing or eliminating marriage penalties for millions of low-income families.

* Hundreds of thousands of children will be lifted out of poverty. Currently the EITC does not provide any additional help for families with more than two children. This plan will fix that-consolidating and expanding on the EITC and lifting hundreds of thousands of children out of poverty.

* Helping Squeezed Middle-Class Families: All middle-class taxpayers with children making up to $100,000 will get a tax cut. This Tax Reform will restore fairness to the tax code, providing a tax cut for all families with children making up to $100,000 annually. Of these families, 15 million low-income families currently receiving net tax credits through the EITC and other credits will get larger tax credits. In addition, 3.2 million low-income adults without children will get expanded tax breaks. In total 31 million families will benefit-with the typical tax cut being $1,477.³

Families First Tax Reform: Representative Families

Helping typical families: A police officer married to a part-time worker raising two children on $50,000 annually-no more federal income taxes. Currently this family pays $1,549 in federal income taxes, this plan will eliminate their taxes - and the government will give them a tax credit refund of $34. That's a $1,583 tax cut. What this means to a typical family:

* $1,500 is five months of groceries⁴
* $1,500 is more than seven months of the worker contribution to a typical health insurance plan⁵
* $1,500 is a year of utility bills for the typical New Hampshire family.⁶

Expanding EITC benefits to reduce poverty: A cashier married to a custodian raising three children while working for the minimum wage-an extra $2,287 tax break. A couple working full-time for the minimum wage - $5.15 an hour -earns $21,000 annually. Under current law their EITC is limited to the first two children. This plan will end that limitation - providing them an additional tax credit of $2,287.

Helping all middle-class families: A firefighter married to a teacher raising two children on an annual income of $85,000-a $975 tax cut. Currently this family pays $7,445 in taxes. This plan will cut their taxes by $975.

Helping single parents: A single parent raising one child on the $30,000 a year she makes in her own small business-$793 to help with the bills. This Families First Tax Reform will eliminate her income taxes and replace them with a credit - in total $793 in tax relief to help with the bills.

Reducing the marriage penalty for low-income couples: Married army privates with two children each making $15,000-Marriage penalty reduced substantially. Under current law, this family faces a marriage penalty. Like many low-income families, they pay more in taxes than they would pay if they were single-$1,499 more. This plan will reduce their marriage penalty, providing a $882 tax cut.

How Families First Tax Reform Works

$2,250 tax credit per child - Consolidating existing tax breaks. Families First Tax Reform will consolidate and expand on four tax breaks for families with children: The Child Tax Credit, the Additional Child Tax Credit, the Earned Income Tax Credit, and the dependent exemption. Instead of filling out forms for each of these tax credits, families will just reduce their taxes by $2,250 per child.

Available for children up to age 17. The Families First Tax Credit will be available for children up to age 17. This and other eligibility rules will be based on the rules for the existing Child Tax Credit. The credit will phase down for families making over $100,000.

Incentives for lower-income families to work. Like the current EITC, the new Child Tax Credit will phase-in with income. A family making $5,000 will be eligible for a refund of up to $2,000 and a family making $10,000 will be eligible for a refund of up to $4,000 annually. The refund will be capped for families with more than three children.

Expanded benefits for low-income adults without children. Clark's Tax Reform builds on the existing EITC for childless adults, raising the maximum credit from $382 to $500.

No families with incomes under $200,000 will be hurt by Families First Tax Reform. No families with incomes under $200,000 will pay more in taxes than they do today.

Paying for Families First Tax Reform

This Tax Reform will restore fairness to the tax system without increasing the deficit. The Family First credits will cost $33 billion annually - which will be fully paid for by:

A 5 percentage point rate increase on income over $1 million annually-Only impacting the top 0.1 percent of taxpayers. The rate increase will apply to families making more than $1 million annually. In tax year 2004, an estimated 200,000 tax units or 0.1 percent of tax filers earned over $1 million annually.⁷ As under current law, the rate increase will not apply to any capital gains and will not apply to the first $1 million earned.

Receipts will be earmarked for lower-income and middle-class families tax reform and could not be used for any other purpose. The money from the 5 percentage point rate increase could only be used for tax reform and could not be used for new spending.

Closing corporate tax loopholes, including ones that reward companies for shifting jobs overseas. Currently the United States provides tax breaks for companies that shift their headquarters - and their jobs - overseas. This plan will crack down on these and other tax shelters, endorsing the Senate Democratic legislation to close tax loopholes that will save an average of $10 billion annually.⁸

$2.35 trillion Savings for America's Future Plan. This plan includes the repeal of Bush tax cuts that benefit families making over $200,000 annually, cutting corporate welfare, streamlining government, and a success strategy for Iraq. This plan ensures that middle class families are protected from the repeal of the dividend and capital gains tax cuts.

Major Tax Reform

This plan established five basic principles for tax reform: It should make the tax code simpler, fairer, more progressive, and more pro-growth - without increasing the deficit.

Simpler - Eliminating hundreds of pages of the tax code and dozens of pages of forms. Families First Tax Reform will make it possible to reduce hundreds of pages of the tax code down to one easy-to-use form. The IRS could eliminate dozens of pages of forms and publications that confuse taxpayers.⁹ All of the confusing definitions of a child used for different parts of the tax code will all be boiled down to one simple definition.

* No-returns tax system. More than half of American families will not have to fill out a tax form.
* Simplicity will benefit low-income EITC families. Currently, as many as 14 percent of the families with children that could benefit from the EITC fail to sign up for the credit.¹⁰ In addition, there are serious concerns about error rates for the EITC. Many errors stem from the confusing definitions of children. These complications cost low-income families-according to the IRS, 68 percent EITC filers use a paid preparer because the forms are too complicated to figure out on their own.¹¹

* Simplifying capital taxation. This plan is committed to further simplifying taxes for middle-class families by reforming the taxation of capital.

Fairer - ending the "Middle Class Parent Penalty" and the low-income marriage penalty. Currently millions of low-income families get a marriage penalty in the form of higher taxes. And middle-class families receive less of a tax break for their children than high- or low-income families.¹² Under Families First Tax Reform families will get the same tax break for having a child.

Middle Class Parent Penalty Under Current Law and The Solution

Under President Bush, families making over $1 million annually got an average tax break of $128,000-while the income of typical families declined by nearly $1,500. This plan will redress this imbalance, providing tax reform that benefits lower- and middle-income families.

More pro-growth. This Tax Reform will help make work pay for lower-incomes parents while lowering marginal tax rates that provide a disincentive for millions of taxpayers to work. Studies consistently find that the EITC provides a major incentive for work and a way to pay for childcare, transportation and other costs associated with getting a job.

* According to one study, more than 60 percent of the increase in the employment of single mothers has been due to expansions of the EITC. Bruce Meyer and Dan Rosenbaum find that 63 percent of the change in the employment of single mothers between 1984 and 1996 can be explained by the expansions of the EITC.¹³

* Another study predicted that the 1993 EITC expansion will induce 516,000 families to move from welfare to work. Stacy Dickert, Scott Houser, and John Karl Scholz found that the 1993 EITC expansion will induce 516,000 families to move from welfare to work. [14]

* Another study shows that increasing the reward to work, increases labor force participation. Nada Eissa and Jeffrey Liebman found that the EITC significantly increases labor force participation among single mothers, especially less educated women.¹⁵

Deficit neutral. Reforming the tax code should not be an excuse to increase the deficit. The Tax Reform will be fully paid for, simplifying and improving the tax code without increasing the deficit.

Background on Families Struggling to Get By

The best-off Americans have the highest share of income since Herbert Hoover was President. The top 0.1 percent of American families get 7.4 percent of the income (not including capital gains) - the highest share of income since 1928.¹⁶

The typical family's income declined by nearly $1,500 under President Bush, compared to a $7,200 increase under President Clinton. Under President Clinton, family income rose from $45,940 in 1992 to $53,142 in 2000 - a $7,202 increase. Under President Bush the typical family's income fell to $51,680 in 2002 - a $1,461 decrease.¹⁷

From 1970 to 2000 incomes for middle-class families stagnated while incomes for the best off exploded. The average inflation-adjusted income for the bottom 90 percent of Americans fell 2 percent from 1970 to 2000, while the average inflation-adjusted income for the top 0.1 percent rose 357 percent (not counting capital gains).¹⁸

* Nearly 3 million private-sector jobs lost. The economy has lost nearly 3 million private-sector jobs under President Bush, including 2.6 million manufacturing jobs - with manufacturing job loss each and every month under President Bush.¹⁹

* Health insurance premiums up $2,630. The typical family's health insurance premium has risen by $2,630 between 2000 and 2003 - a 41 percent increase.²⁰

* Record personal bankruptcies - growing 7.8 percent in 2003. Personal bankruptcies grew 7.8 percent in FY 2003 to over 1.6 million - the highest number of filings on record.²¹

* Half of personal bankruptcies are due to health care costs. A study by Jeanne Lambrew found that "about half of all Americans who file for personal bankruptcy protection do so because of health care costs."²²

[1] William Gale and Janet Holtzblatt, 1997, "On the Possibility of a No-return Tax System," National Tax Journal.

[2] Jeffrey Liebman, 1/04/03, "Preliminary Estimate of the Effects of General Wesley Clark's Tax Reform Proposal."

[3] Jeffrey Liebman, 1/04/03, "Preliminary Estimate of the Effects of General Wesley Clark's Tax Reform Proposal."

[4] Based on Bureau of Labor Statistics, Consumer Expenditure Survey.

[5] Based on Kaiser Family Foundation, 2003, Employer Health Benefits: 2003.

[6] http://www.nhhfa.org/programdocs/2003rentsurvey_state.pdf.

[7] Urban-Brookings Tax Policy Center, 9/30/03, "Combined Effect of EGTRRA and JGTRRA: Distribution of Income Tax Change by AGI Class, Pre-EGTRRA Baseline, 2004."

[8] Joint Committee on Taxation, 5/13/03, "Estimated Budget Effects of the ÔJobs and Growth Tax Relief and Reconciliation Act of 2003,' Scheduled for Consideration by the Committee on Finance on May 13, 2003."

[9] Rahm Emanuel, 10/15/03, "Democrats Can Win on Taxes," "Wall Street Journal.

[10] Len Burman and Deborah Kobes, 1/18/2002, Urban-Brookings Tax Policy Center Policy Note, http://www.taxpolicycenter.org/commentary/eitc_gao.cfm.

[11] Internal Revenue Service, 8/3/03, "Earned Income Tax Credit (EITC) Program Effectiveness and Program

Management FY 2002 - FY 2003."

[12] David Ellwood and Jeffrey Liebman, 2001, "The Middle-class Parent Penalty: Child Benefits in the U.S. Tax Code," Tax Policy and the Economy.

[13] Bruce Meyer and Dan Rosenbaum, September 1999, "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers." National Bureau of Economic Research Working Paper No. 7363.

[14] Stacy Dickert, Scott Houser, and John Karl Scholz, 1995, "The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation." Tax Policy and the Economy.

[15] Nada Eissa and Jeffrey Liebman, 1996, "Labor Supply Response and the Earned Income Tax Credit," Quarterly Journal of Economics.

[16] Calculations based on data from Thomas Piketty and Emmanuel Saez, originally in "Income Inequality in the United States, 1913-1998," NBER Working Paper No. 8467. Available at http://emlab.berkeley.edu/users/saez/.

[17] Calculations based on Census Bureau data.

[18] Calculations based on data from Thomas Piketty and Emmanuel Saez, originally in "Income Inequality in the United States, 1913-1998," NBER Working Paper No. 8467. Available at http://emlab.berkeley.edu/users/saez/.

[19] Bureau of Labor Statistics data.

[20] Kaiser Family Foundation, 2003, Employer Health Benefits: 2003.

[21] American Bankruptcy Institute, 11/14/03, "Personal Bankruptcy Filings Continue to Break Records."

[22] Jeanne Lambrew, November 2001, "How the Slowing U.S. Economy Threatens Employer-based Health Insurance," Commonwealth Fund.

Okay, this is not a plan I came up with. This was General Wesley Clark's plan announced during his 2004 Presidential run. It remains a great plan.