Friday, November 19, 2010


As expected the proposal to start from “ground zero” by doing away with all “tax expenditures” currently in the Tax Code from the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform has not been universally praised. Taxpayers are all for simplifying the Code and raising taxes on others, but do not want to give up any of the benefits they are getting. And Congresscritters, who care more about themselves and getting reelected than in properly running the government, will fight any efforts to put an end to their pet tax deductions, credits and loopholes as long as the money keeps flowing in from lobbyists.

The release of the draft has resulted in increased discussion of the issue of “tax expenditures”, a topic of concern for a while now. I have been talking about the problems for years, and most recently Mortimer Caplin, the IRS Commissioner during the terms of Presidents Kennedy and Johnson commented on the situation, as reported in “Former Commissioner Blasts IRS’s Social Mission”, which I highlighted in a recent BUZZ installment.

The article pointed out that Caplin “believes the Internal Revenue Service is currently facing a tougher task than it did back when he was commissioner as a result of the additional roles handed it by Congress through the enactment of new social programs”.

The item further states –

However, IRS responsibilities today revolve not only around tax collecting, but also include policing social and economic policies with limited resources. The passage of the health care bill add exponentially to an already packed list of administering homebuyer credits, economic stimulus disbursements, and work pay credits, among others, he noted.”

Former Commissioner Caplin, correctly, pointed out –

Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down.”

And most important –

And instead of having an annual appropriation, which gets examined yearly, the programs get into the Tax Code but never get out. Congress has to be more selective. They’re leaning more on giving credits than on appropriations.

It’s more difficult to amend the Internal Revenue Code than cut an appropriation. Congress should not be in the habit of just automatically adding another credit to the code

What better way to begin the process of rewriting the Tax Code then to start with no deductions or credits and add back only those that are appropriate and necessary?

I am not saying that we should totally do away with the benefits provided by the Earned Income Credit, the various education tax credits and deductions, and other such “expenditures” that are currently complicating the Tax Code. What I am saying, and what has been said by many others, is that these are social programs and should not be administered via the Tax Code.

Here is what I suggested in my post “There Has Got To Be A Better Way” from August of 2009 -

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.

(4) 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.

(5) 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.


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