Wednesday, June 17, 2015
FOUR REASONS TO REMOVE THE EITC FROM THE TAX CODE
Over at the TAX JUSTICE BLOG Kayla Kitson lists “Four Reasons to Expand and Reform the Earned Income Tax Credit”.
I contend that there are at least as many reasons to take the Earned Income Tax Credit out of the Tax Code and instead distribute the benefits through normal existing welfare programs.
Let’s make one thing perfectly clear upfront – the Earned Income Tax Credit is a federal welfare program, perhaps the biggest federal welfare program currently in existence. The direct cost of the EITC to the U.S. federal government was about $56 Billion in 2012.
Actually it is not Kayla but the nonpartisan Congressional Research Service (CRS) that advocates expansion via a recently released “report that makes a strong case for making permanent EITC provisions that are set to expire in 2017 and also improving the credit for low-income workers without children.”
The first reason given for expansion is “EITC Increases Employment”.
I have my questions about this statement –
“There is strong empirical evidence that the EITC increases labor force participation among single mothers. In fact, one study found that 34 percent of the increase in employment for this group between 1993 and 1999 can be attributed to expansions of the EITC.”
As the report suggests in reason #4, which covers the “reform” area of the report, there is indeed “complexity in eligibility rules and credit formulas” for the EITC. In my opinion the only people who truly understand the workings of the EITC are tax professionals and tax cheats.
I really doubt that a person decides to go to work, or work more, because they are aware of the fact that they will receive a bigger refund check from Uncle Sam at tax time. A person decides to work, or work more, because he/she needs the money to feed their family.
In most legitimate EITC cases, at least initially, the qualified individual (I cannot really say qualified “taxpayer” because a large majority of EITC recipients are not tax “payers”) first learns about the EITC in the process of having their tax returns prepared.
I would like to see some concrete proof that individuals actually made the decision to go to work, or to work more, because of the EITC.
Here are my “Four Reasons to Remove the EITC from the Tax Code” –
1. The purpose of the federal income tax is to raise the money necessary to administer the government. Period.
It is not meant to be used for “social engineering” – distributing federal welfare or other social benefit programs or redistributing income – or to discourage or encourage specific behavior (other than possibly to encourage savings, investment, and growth).
2. The benefits of the EITC, and any other government welfare or benefit program distributed via the 1040 (tuition assistance, energy credits, etc), are not received “upfront” when it is needed.
The benefit is actually paid as much as a year “after the fact”. The credit for 2014 is based on 2014 income, but is not distributed until the spring of 2015 after the Form 1040 (or 1040A) has been filed and processed. But the benefit is needed when struggling to pay bills or put food on the table due to low income and reduced earnings, when actually paying for college or trade school, or when actually purchasing energy efficient products.
Unemployment benefits are paid while the person is actually unemployed. And traditional Aid to Families with Dependent Children is paid during the period of low income or un- or under-employment. You do not have to wait 6 months to a year to get your unemployment or traditional welfare payments.
Parents of college age children receive traditional Student Financial Aid at the time when the tuition and fees are due, and when books need to be purchased. You do not have to wait 6 months to a year to get your financial aid, after you have been forced to borrow money to pay for the tuition, fees, and books.
3. The actual cost of federal welfare, and educational assistance, energy incentives, etc, as a percentage of the total budget is distorted.
The costs of benefits distributed through the Tax Code are not counted as expenses of the actual program activity – they are reported as reduced income tax collection. It also distorts federal budget reporting by creating the infamous “47%”. If properly done there would be much fewer Americans not paying any income tax. Benefit recipients would actually be paying tax, but receiving more in direct federal benefits.
4. Probably the most important reason – Tax credits, especially refundable credits, are a magnet for tax fraud.
It has been determined, by various sources at various times, that 1/2 to 1/3 of all EITC claims are incorrect if not outright fraudulent. 1/3 of $56 Billion is almost $19 Billion in money stolen from the federal government. Similar error/fraud rates have been attributed to other refundable credits.
Delivering government benefits through traditional venues would provide for more scrutiny and examination of claims by the appropriate agency. The IRS is not the appropriate agency. And tax preparers should not be forced to become Social Workers (often uncompensated because they do not properly charge EITC clients for the time involved) and determine if a person qualifies for federal welfare.
Here is an additional reason (as if more were needed). The complexity of the EITC, and of the various tuition tax benefits, almost requires claimants to seek paid professional help at tax time. And the recent excessive due diligence requirements for tax professionals preparing returns with an EITC claim could substantially increase the fees charged. So a low income individual, who truly needs the benefits of the EITC, is forced to pay a potentially substantial fee to be able to collect their federal welfare. When a person applies for Aid to Families with Dependent Children does he/she have to pay an “application fee”?
So it seems clear – at least to me - that the Earned Income Tax Credit does not need to be expanded. It needs to be removed from the Tax Code!