Tax Roundup, 8/7/2013: Tax credits! That’s the ticket! And: would low-income workers be better off without the earned income credit?

August 7th, 2013 by Joe Kristan
Tax Credits! - The Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

Tax Credits! – The Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Whatever the question, some folks answer “tax credits!”   From The Des Moines Register:

A former state lawmaker says he will try to rally school, city and county associations to support legislation that would provide tax credits to those who buy empty or abandoned public buildings and create jobs.

Clarence Hoffman, a Denison Republican who served in the Iowa House from 1998 to 2008, said a Des Moines Register Reader’s Watchdog column that raised the question of what to do with abandoned schools across Iowa was the catalyst for his renewed interest in seeking the legislation.

Tax credits!  Problem solved!  Except for the new ones, like:

– Once more the tax law is more complicated, and tax enforcement resources have to be spread even thinner to keep this new credit from being a fraud magnet, like so many others.

– The price of neighboring buildings owned by private owners will be depressed by subsidies offered for the competing public property.  The credit will “solve” the problem of hard-to sell public property by taking money out of the pockets of other property owners.  Maybe Mr. Hoffman can offer still another tax credit to solve that problem.

 

Would low income taxpayers be better off with no earned income tax credit and lower tax rates?  That intriguing possibility is raised in a new Tax Foundation study of the economic effects of repealing the fraud-ridden EITCRichard Morrison discusses the study in the Tax Policy Blog (my emphasis):

The credit does help workers with very low incomes. For workers with higher earnings, the credit continues to raise incomes until it is fully phased out. The phase-out, however, does discourage workers from accepting more hours worked by reducing the amount of additional pay they would otherwise receive. As a result, our research suggests that the negative impact of the phase-out depresses the labor supply by more than the phase-in bolsters it. 

The EITC serves as a poverty trap by imposing a high hidden marginal tax rate because of the way increasing income reduces the credit.  Iowa makes the problem worse by pairing its EITC with the federal credit, leading to marginal tax rates as high as those of the highest income earners:

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

 

More from Mr. Morrison:

It is possible that tax reformers in Congress could alter the Earned Income Tax Credit in any number of ways rather than eliminating it, but in the spirit of our Economics of the Blank Slate analysis series, we modeled a scenario in which it was dropped from the code entirely. It’s important to remember, though, that our analysis also found that pairing an EITC repeal with an across-the-board tax cut would increase GDP by $125 billion per year and add 783,000 full-time jobs. Those additional opportunities would also be good for low-income workers.

But what about the poor grifters who siphon off 25% or so of the EITC?  How can we help them?

 

Jason Dinesen,  Iowa Tuition and Textbook Credit and Back-to-School Shopping

William Perez, Anspach on the Benefits of Roth IRA Conversions

Missouri Tax Guy,  Tax Planning for Freelancers: Are You Prepared?  “One of the most common mistakes that freelancers make is that they don’t properly budget for taxes.”

Peter Reilly,  Internet Password Protocol Not A Charitable Activity

 

Quotable:

With the possible exception of Uncle Sam’s continual – and often horrendous – misuse of its military prowess, no government policy in America is as uncivilized – as offensive to common decency – as destructive of property rights – as arbitrary in its justification and in its applicationas incompatible with freedom – as conducive to corruption – as downright sickening and maddening as is civil forfeiture.

-Donald Beaudreax

 

TaxProf, The IRS Scandal, Day 90.

David Brunori, Lotteries are Winners, Except for the People (Tax Analysts Blog):

You see the lottery system is a big fat scam. It takes money from poor people. Am I the only person who finds it bizarre that the government would raise money from a regressive lottery and then celebrate by giving the money back to the poor and dispossessed in the form of scholarships?

It’s like so many government “benefits” — they take your money, and then they tell you how wonderful it is when they give some of it back.  That’s just as true for “economic development” tax credits.

 

Howard Gleckman, A Summer Update on Tax Reform (TaxVox)

Anthony Nitti, The Problem With Corporate-Only Tax Reform

TaxGrrrl, NC Lawmakers Reckon With The Three Rs: Reading, Writing & (Tax) Reform

Tax Justice Blog,  State News Quick Hits: Irresponsible Tax Promises in Gubernatorial Campaigns – and More

 

Is it really wise to smoke them?  Treating Twinkies Like Crack (Joseph Thorndike, Tax Analysts Blog)

The Critical Question:  NORTH CAROLINA TAX REFORM:  GOOD OR BAD??  (Brian Strahle)

Kay Bell, ‘Racist’ tanning tax assailed by GOP Representative. Racist?  How about plain old stupid?

 

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