Thursday, September 4, 2008

NO MORE REFUNDABLE TAX CREDITS!

As I previously mentioned in a WHAT’S THE BUZZ posting, the official Democratic Party Platform plank on tax policy begins with the statement, “We must reform our tax code. It’s thousands of pages long, a monstrosity that high-priced lobbyists have rigged with page after page of special interest loopholes and tax shelters.” An excellent sentiment, and one with which I agree. But having made that fine statement the plank goes on to call for tons more complexity to be added to the Tax Code!

Much of the added complexity called for by Barack Obama and the Democratic Party comes in the form of refundable tax credits. Much like the current Earned Income Tax Credit, which has become probably the most abused provision of the Code (studies have suggested that close to 30% of all EITC claims are erroneous). One such credit is the “American Opportunity Tax Credit”.

According to Barack Obama’s website - “This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Obama will also ensure that the tax credit is available to families at the time of enrollment by using prior year's tax data to deliver the credit when tuition is due.” The official Democratic Party Platform adds, “In exchange for the credit, students will be expected to perform community service.” Specifically they will be required to perform 100 hours of community service during the year.

Professor Jim Maule discusses this proposed Credit in two posts to MAULED AGAIN, “Does It Make Sense to Overload the IRS and the Tax Code?”, posted back in March, and the recent “Proposed Tax Credit: Noble Concept, Practical Problems”. Jim has rightfully commented, “There is a problem with using taxation to control behavior. For example, the Internal Revenue Code is overloaded with credits and other provisions dealing with energy conservation, energy production, adoption of children, and other issues better handled more directly. Everyone complains about the complexity of tax laws, yet too many people jump on the bandwagon of proposals that contribute to that complexity.”

While I agree that it is a good idea to encourage both higher education and community service, just as it is a good idea to provide assistance and encouragement to the working poor, and that the government should provide incentives to these ends, I do not think we should do this by adding more and more pages to the already humungous Tax Code, and creating more potential for tax fraud. As the Professor has said, these issues are “better handled directly”.

The Earned Income Tax Credit is basically a welfare program, another form of Aid to Families with Dependent Children. Let the government expand this program if that is its wish. Regarding Barack’s proposed credit, as Jim says, “If the goal is to reward college students for providing services, why not simply issue a check to the student?

Professor Maule correctly points out that this new credit will create an administrative nightmare for all involved -

Will the taxpayer be required to list the organizations for which the service was performed? Will the taxpayer be permitted to write something along the lines of "picked up litter in neighborhood park every Saturday for 1 hour"? Will the taxpayer be required to obtain letters or other documents from a supervising agency? Will the taxpayer be required to attach those documents to the return? Will states and localities be compelled to organize entities to issue those documents, thus formalizing what now transpires as informal contributions of time to public service endeavors?

Politicians must realize that the Tax Code should not be used to solve all of the ills of society. But then, as Grouch Marx once said, "Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies."

2 comments:

Peter said...

Shhhhhhh!

Everytime the Democrats "simplify" the tax code, I get richer.

R.T. said...

I just read an op/ed piece on the NYTimes website about McCain's healthcare plan. (http://www.nytimes.com/2008/09/16/opinion/16herbert.html?em) And McCain's healthcare plan is all about refundable tax credits...for everyone that's receiving health benefits through their employer. Not just families with college-bound kids. A much larger section of the American populus.