Jeff Bezos has suggested that the roughly 50% of individuals with AGI of $54,000 or below pay no federal income tax (see Gabrielle Olya, "Jeff Bezos Wants $0 Federal Income Tax for Anyone Earning Under $54K - Would You Benefit?," MoneyLion, 5/22/26 (I'm quoted in this article)).
Senator Booker proposes the Keep Your Pay Act, to provide a $75,000 standard deduction for married couples filing jointly and proportionate relief for other filing statuses (3/9/26 press release).
I think these are good ideas for low-income taxpayers and for the economy, but need to consider how the law works today. These considerations include:
1. Low-income individuals today generally don't pay federal income taxes due to the standard deduction, Earned Income Tax Credit (EITC), and child credit.
2. BUT if the low-income individuals are employees or self-employed, they pay 15.3% payroll taxes on earnings (considering their 7.65% and that they economically bear the employer's 7.65%), and 15.3% on net earnings if self-employed. The EITC provides some relief for these taxes, but not necessarily all of it.
Individuals with capital gain income generally pay 15%, making that rate look low or the payroll tax or self-employment tax rate for low-income individuals look high.
3. The federal and state governments deliver benefits to low-income workers through the tax law. So, these proposals should not leave low-income workers out of the system, but instead greatly increase their standard deduction and continue to use the income tax filing process to claim the EITC, child tax credit and other refundable credits.
4. The child tax credit is not fully refundable (only up to $1,700 rather than $2,200). Meanwhile, higher income individuals with a child under age 17 get the full $2,200 (this credit doesn't start to phase down until a high income level of $400,000 if MFJ).
5. Other credits should be made refundable, such as the child and dependent care credit. And, an income phaseout should be added to this so that individuals with income above, say $250,000 don't qualify for this credit of $600 or $1,200 depending on the number of children under age 13 getting care. Or, this subsidy should instead be directed to providing more free or low-cost child care centers for low-income workers.
6. To provide assistance throughout the year, the refundable and advancable and higher child tax credit that was in the American Rescue Plan Act of 2021 (P.L. 117-2) should be reinstated. The U.S. Census Bureau estimates that this caused a 46% decline in child poverty. What a tremendous benefit to these families and our economy.
What do you think?
4 comments:
One thought I have is that many of the proposals being discussed focus on expanding the Child Tax Credit, which certainly helps families with children. But what about the single worker making $40,000 per year, the young couple just starting out, or the self-employed tradesperson earning $50,000?
For many lower-income workers, federal income tax is already minimal due to the standard deduction and existing credits. The larger federal tax burden is often payroll tax. A worker earning $40,000 still pays about $3,000 of Social Security and Medicare tax, and a self-employed individual pays both halves.
Rather than creating additional income tax exclusions, Congress could consider a refundable payroll tax credit for workers below a certain income threshold, perhaps $54,000 of AGI, with a gradual phaseout above that level. Employees could receive a credit equal to their employee share of payroll taxes, while self-employed individuals could receive a credit for the employee-equivalent portion of self-employment tax while continuing to pay the employer-equivalent portion.
This approach would reward work, increase take-home pay, and provide relief to low-income workers regardless of whether they have children. A gradual phaseout would also avoid creating a cliff where earning one extra dollar results in losing the entire benefit.
If the goal is to help working Americans, we should consider relief targeted at the taxes they actually pay.
Great ideas. Thanks for the comments.
IRS was told not to collect interest and penalties during Covid but ignored IRC 7508 as in effect and collected these anyway. The process of requesting a refund is incredibly cumbersome and will be near impossible for most taxpayers, even those with professional assistance, to complete by the July 10 2026 deadline. As reported by the taxpayer advocare, the rights to be informed and to pay no more than owed, have been violated. More time for these refunds is needed and the IRS should automatically refund excess collections to all taxpayers without requiring an unreasonably burdensome refund request process.
Very interesting proposal. The big issue with eliminating the payroll tax is obviously how to fund social security benefits and Medicare without them. We're already in a tax gap that, if it were closed, would go a long way toward resolving the "SSA trust fund runs out of money soon" cliff. These benefits are earned. So if workers don't pay in, they won't be covered, and even that meager safety net collapses. Perhaps the answer is to rethink how Medicare and SSA retirement, disability, spousal, dependent and survivor benefits are earned and doled out.
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