READ MY LIPS - REFUNDABLE TAX CREDITS BAD!

 

Congress is currently considering several federal income tax proposals from both sides of “the aisle”.  One item being considered is reviving the COVID-19 inspired practice of sending monthly checks to families as advanced payment of the Child Tax Credit, which must be reconciled on the Form 1040.

The greatest source of federal tax fraud, Tax Code complexity, taxpayer confusion, and tax preparer agita is refundable tax credits.

As an example, quoting a recent BUZZ item (highlight is mine) –

“The EITC {Earned Income Tax Credit, which is refundable – rdf} has a long history of erroneous overpayments. Indeed, based on the data available on PaymentAccuracy.gov, between 2004 and 2022, the EITC error rate averaged 25 percent. After adjusting for inflation, EITC overpayments totaled $351 billion over that 18-year period.”

As a professional tax preparer, I always claimed the full amount of tax credits and other benefits to which my clients were entitled under tax law – but as a citizen and taxpayer I oppose most of at least the credits and all refundable components.

Refundable tax credits are a major part of a larger problem - the erroneous practice, an apparent favorite of Congress, of distributing federal welfare and other social program benefits via the Tax Code.

Let me re repeat what I have been saying for years – I very seriously and sincerely believe that the one and only purpose of the federal tax system is to raise the money necessary to fund the government. 

The federal income tax system should –

(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake.

(2) Be fair and equitable - treat all taxpayers equally.

(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.

(4) Encourage savings, investment, and growth.

(5) Index for inflation all allowable deductions and credits.

The Tax Code should not –

(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.

(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.

(3) Contain any refundable credits.

(4) Contain any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income.

(5) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).

(6) Contain any temporary deductions, credits, benefits, or provisions.

The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.  This practice is not only inappropriate, but it also invites and encourages tax fraud.

I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.

Distributing the benefits in this manner is much better than the current method for many reasons:

(1) It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.

(2) The qualifying individuals 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 calculate the true income tax burden of individuals. Many of the infamous “47 percent” of Americans - who either pay no income tax or get a “gift” from the government by filing a tax return - would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.

(4) We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.

Your thoughts?

TTFN