Tuesday, October 28, 2008


Sorry for the crack, Barrack. I couldn't resist the Broadway reference.
Just thought I would weigh in with my comments on the issue of “redistribution of wealth” and "refundable" tax credits.

I personally do not believe in a “progressive” tax system, like the one currently in place, where individuals with higher income pay a higher percentage of their income in taxes.

An argument can be made that the more money a person makes the more he needs and benefits from the services and protections of the government - so a person who makes more should pay more taxes. If there were a flat tax then a person making $250,000 would obviously pay more than a person making $25,000 – although not proportionally so.

The truth is that in many cases the lower one’s income the more benefits, services and protections one receives from the government. I remember reading an article back in the late 1970s which compared a household of working taxpayers who earned too much to receive much government “assistance” of any kind to a household that was basically, as my mentor Jim Gill would say, “on the tit”, that is taking full advantage of the many welfare, disability and unemployment benefits available to them from the government. When one added up the dollar value of all the payments and free benefits and services received by the non-working household from various federal, state and local agencies and calculated the take-home pay, after various tax and other withholdings, of the working household it turned out that the non-working household actually ended up with a higher income!

I do not believe that the Tax Code should be used to “redistribute” wealth or assist in providing “welfare” to lower income individuals. The purpose of the federal income tax is to raise the money necessary to run the government – period. While the Code can encourage certain positive activities such as saving and investment, higher education, charitable contribution and volunteer work, home ownership, etc – all things that benefit society in general – it should not be used for “social engineering”.

I am also against the concept of “refundable” tax credits – credits that allow an individual or family to “make a profit” from filing a tax return. This includes the current Earned Income Tax Credit and the Child Tax Credit.

As the Tax Policy Center’s TAX VOX blog recently pointed out in a post, the Earned Income Tax Credit is basically the largest poverty program in the U.S. It distributes $42 billion to more than 20 million low-income families. It is, for the most part, just another form of Aid to Families with Dependent Children.

While I am not against tax relief for the working poor or the concept of providing aid to families with dependent children, or other types of welfare programs for the working poor, I strongly believe these concepts should not be incorporated into the Tax Code.
The EITC does not provide the safeguards, checks, and balances required in other federal and state welfare programs necessary for responsible fiscal management. As a result, it is perhaps the most abused provision of the tax code. Studies have suggested that close to 30% of all EITC claims are bogus.

Refundable credits in general encourage tax fraud. This is because the fraudulent tax return that is created does not rely on withholding, which is carefully matched by the IRS, to generate the refund. The crook can make up “non-matchable” income, such as earnings from self-employment, to generate the phony refund.

A recent post at Pete Pappas’ THE TAX LAWYER’S BLOG asked the questions “Do 'rich' people have a civic duty to help the middle class and the poor?” and “How to you define rich?”.

First of all, as I said in my comment to Pete’s post, rich in terms of a dollar amount is different in different parts of the country. A couple in one part of the country could truly live like royalty on what a couple in another part of the country (especially here in the Northeast) needs to just keep their heads above water. Unfortunately the Tax Code uses one set of numbers for the entire country – and unfortunately I cannot offhand think of an easy way to correct this inequity. The result is that those in New York, New Jersey, Massachusetts, Connecticut, California, and similar areas end up being royally screwed.

While the government may have a responsibility to help the middle class and the poor by providing various welfare and benefit programs, I do not believe the so-called “rich” have any civic duty to do anything other than treat their employees fairly, honestly and equally. Obviously the wealthy should not be allowed to improperly build their wealth on the backs of the working class – but that is where the “duty” ends.
There may be a moral, ethical, or religious “duty” for an individual to be “charitable”, but it is not one that should be imposed by government through the use of the federal income tax system.

That’s what I think. So what do you think?


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