As Rob Tueber points out in a recent post “The IRS is Not Just About Taxes” at his TAX LAW FORUM blog-
“The recent National Taxpayer Advocate’s mid-year report observes that the IRS has, over the past several years, developed into a dual role agency. The report identifies that the IRS’ roles are now:
1. To encourage tax compliance and
2. To deliver social benefits and programs”.
For years now I have been saying that the Tax Code should not be used to deliver social benefits and programs. The one and only purpose of the Tax Code is to raise money needed to pay for the government, and the purpose of the IRS is to process tax returns and collect tax. The IRS really should be just about taxes.
Having federal welfare and education and housing subsidies run through the Form 1040 totally distorts the federal budget and the federal “financial statements”.
Much has been written and said about the fact that under current law almost one-half of the American population pays absolutely no federal income tax – and many actually make a profit by filing a 1040. While this is a true statement it is misleading.
The reason almost half of the population are “tax-nonpayers” is because of credits like the Earned Income Credit, the Child Tax Credit, the recent First-Time Homebuyer Credit, and the American Opportunity Credit, all of which have refundable components.
The Earned Income Credit and the refundable portion of the Child Tax Credit is really Aid to Families With Dependent Children - or welfare. The various education tax benefits are really student financial aid. The First-Time Homebuyer’s Credit is a housing subsidy.
Here is what I wrote in an earlier post from August of last year –
Why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.
And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a “first-time” homebuyer. A “Statement of Qualification” could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.
If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.
Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.
And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?
Doing things in this way would be beneficial in many ways.
(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.
(2) The qualifying individual(s) would get the money at the “point of purchase”, when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.
(3) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.
(4) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit.
What inspired the post in which the above appeared was the “Cash for Clunkers” program. This was a targeted benefit program that was not run through the Tax Code. It had no affect whatsoever on the Form 1040. The money was applied to the qualified purchase at the point of purchase. While I have not done any special review of the program or its results it appears that it was as successful and went as smoothly as one would hope for a government-run benefit program.
Other than the fact that it is easy for these items to be run through the 1040 and the IRS (and we all know that Congress is basically lazy) I can think of no logical reason why we should continue to run social benefit programs, regardless of the appropriateness of the individual benefit or program, through the Tax Code.
Don’t get me wrong. As a tax professional I take full advantage of all the above discussed credits and deductions available to my clients when preparing my 1040s, and am happy to put the extra money in their pocket, because it is allowable under the law as written. It is just my opinion that that is not how the law should be written. I am not against my clients putting the money in their pocket – far from it. I am just against the way it is done.
As I have said 2011 is the year that Congress must sit down and totally reform the Tax Code. Removing social programs and social engineering from the tax process will go a long way to making the Tax Code much simpler and much fairer.
TTFN
“The recent National Taxpayer Advocate’s mid-year report observes that the IRS has, over the past several years, developed into a dual role agency. The report identifies that the IRS’ roles are now:
1. To encourage tax compliance and
2. To deliver social benefits and programs”.
For years now I have been saying that the Tax Code should not be used to deliver social benefits and programs. The one and only purpose of the Tax Code is to raise money needed to pay for the government, and the purpose of the IRS is to process tax returns and collect tax. The IRS really should be just about taxes.
Having federal welfare and education and housing subsidies run through the Form 1040 totally distorts the federal budget and the federal “financial statements”.
Much has been written and said about the fact that under current law almost one-half of the American population pays absolutely no federal income tax – and many actually make a profit by filing a 1040. While this is a true statement it is misleading.
The reason almost half of the population are “tax-nonpayers” is because of credits like the Earned Income Credit, the Child Tax Credit, the recent First-Time Homebuyer Credit, and the American Opportunity Credit, all of which have refundable components.
The Earned Income Credit and the refundable portion of the Child Tax Credit is really Aid to Families With Dependent Children - or welfare. The various education tax benefits are really student financial aid. The First-Time Homebuyer’s Credit is a housing subsidy.
Here is what I wrote in an earlier post from August of last year –
Why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.
And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a “first-time” homebuyer. A “Statement of Qualification” could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.
If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.
Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.
And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?
Doing things in this way would be beneficial in many ways.
(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.
(2) The qualifying individual(s) would get the money at the “point of purchase”, when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.
(3) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.
(4) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit.
What inspired the post in which the above appeared was the “Cash for Clunkers” program. This was a targeted benefit program that was not run through the Tax Code. It had no affect whatsoever on the Form 1040. The money was applied to the qualified purchase at the point of purchase. While I have not done any special review of the program or its results it appears that it was as successful and went as smoothly as one would hope for a government-run benefit program.
Other than the fact that it is easy for these items to be run through the 1040 and the IRS (and we all know that Congress is basically lazy) I can think of no logical reason why we should continue to run social benefit programs, regardless of the appropriateness of the individual benefit or program, through the Tax Code.
Don’t get me wrong. As a tax professional I take full advantage of all the above discussed credits and deductions available to my clients when preparing my 1040s, and am happy to put the extra money in their pocket, because it is allowable under the law as written. It is just my opinion that that is not how the law should be written. I am not against my clients putting the money in their pocket – far from it. I am just against the way it is done.
As I have said 2011 is the year that Congress must sit down and totally reform the Tax Code. Removing social programs and social engineering from the tax process will go a long way to making the Tax Code much simpler and much fairer.
TTFN
2 comments:
I have to totally disagree. We have a similar range of benefits (welfare) in Australia that are paid out via the tax department (or by other agencies when they get income information from the tax department to determine eligibility). Aside from the usual problems with blatant tax fraud (ie. not declaring all income), having payments processed via the tax system, or based on income data provided by the ATO, results in payments being targetted to the intended recipients -- usually means (income) tested.
Suggesting the other departments could process payments by relying solely on recipients declaring their income accurately 'or be charged with perjury' is pie-in-the-sky. There is plenty of evidence that people DO lie about their income in order to claim benefits (plenty of examples of unemployment benefit fraud are reported each year here in Australia), so they'd be a huge administrative overhead if you required departments to attempt to identify and prosecute those who had 'committed perjury' when claiming a benefit.
Having the tax office process payments and apply eligibility criteria is vastly more efficient than trying to get other departments to independantly very claimants incomes.
And having the tax office pay out benefits in no way obscures the overall data regarding federal income tax receipts and welfare payments -- they are all tracked and reported.
EW-
I have no problem with using IRS information to verify the income of a potential beneficiary. My problem is with using the Tax Code and the 1040 for distribution of benefits.
The tax receipts and welfare benefits may be properly tracked and reported in Australia - but certainly not in the US.
TWTP
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