Tax Roundup, 3/21/2013: Helping the poor by increasing their marginal tax rate. Also: Demutualization semi-win!

March 21st, 2013 by Joe Kristan

Most people would say that making low-income taxpayers pay a higher tax rate on each additional dollar they earn would be a funny way of “helping” the poor.  Yet that’s just the approach of a bill passed yesterday by the Iowa Senate to raise Iowa’s earned income tax credit (SF 422).  The bill would raise the Iowa earned income credit from current 7% of the federal credit to 20%.

The credit phases out as income increases; that means taxpayers who receive the credit have a high hidden tax rate on additional income — their regular tax rate, plus the lost earned income credit.  That gives them higher tax rates than the highest earners on each additional dollar of income.  Here is a new chart showing the marginal tax rates on an EIC recipient with three children as income rises under SF 422:

20130321-2

 

The marginal Iowa tax rate on EIC recipients would be around 10%.  That compares with an effective rate of just over 6%, counting the deduction for federal taxes, for Iowa’s highest earners.  Combined with the federal effective phase-out rate, the EIC earners face marginal rates over 50%.  That makes the EIC a poverty trap.

The EIC is a “refundable” credit — which means that if you don’t have enough tax to use the credit, the government writes you a check for the difference.  That makes it a welfare program, not a tax cut.  Yet the press often gets this wrong:

Omaha.com: Iowa Senate OKs tax cuts for low-income families

KCRG.com: Iowa Senate Approves Tax Break for Low-income Families

Spending is still spending, even when it’s run through a tax return.  This spending, though, is likely to get no further; even if the House passes this – very unlikely – the Governor vetoed a similar bill last session.

 

Cara Griffith, A Culture of Mistrust (Tax.com):

I recently spoke at a conference about transparency in state tax administration. Among other issues that were discussed, I suggested that there is a culture of mistrust between taxpayers and practitioners and state tax officials. When I suggested that the feeling was one of “us” vs. “them,” heads began to nod and many mouthed a silent yes. It
confirmed what I already knew: the culture of mistrust between taxpayers and state tax officials is very real.

But state tax authorities seem to perpetuate the culture of mistrust, in part because they have a tendency to play “hide the ball.” That is, they don’t let taxpayers in on the rules by which they are expected to play. The reason is that state taxing officials have a significant amount of discretion to adjust taxpayer incomes yet they don’t provide aroadmap for how and when that discretion will be used.

So true.

 

In other news:

Me: Taxpayer gets basis of 60% of IPO price in demutualized shares in Arizona case.  Taxpayers don’t win it all, but still a defeat for the IRS.

Russ Fox, When a W-2G (or Other Information Return) Is Wrong.  It happens.

Kay Bell, Tax penalty relief for some who file for an extension

TaxGrrrl, Taxes From A To Z (2013): K Is For Kidnapped Children

Donald Marron, TPC’s Upcoming Leadership Change (TaxVox)

Ellen Kant, U.S. Corporate Tax Rate Fails to Move with Competition (Tax Policy Blog)

Patrick Temple-West,  Tax reform spurs bipartisan lobbying, and more

William Perez,  Senate to Begin Tax Reform Hearings

Jack Townsend,  Acquittal in Pflueger Involving Offshore Accounts.

 

David Brunori, Everybody Loves a Drone (Tax.com)

News you can use: Internal Controls Are of the Devil (Or: Why Stealing from the Catholic Church Is So Easy) (Going Concern)

 

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