Can a program that wastes 25% of its cost be worthwhile? While many economists left and right say the Earned Income Credit is a great poverty fighting tool, some of us who do tax for a living aren’t so sure. Now two scholars at the libertarian Cato Institute have published a report that fleshes out some of these doubts: Earned Income Tax Credit: Small Benefits, Large Costs. The report provides this background:
While the EITC is administered through the tax code, it is primarily a spending program. The EITC is “refundable,” meaning that individuals who pay no income taxes are nonetheless eligible to receive a payment from the U.S. Treasury. Of the $69 billion in benefits this year, about 88 percent, or $60 billion, is spending.
Articles by liberal and conservative pundits regarding the EITC often make it seem as if there are few downsides to the program. The EITC is aimed at reducing poverty and encouraging work. Who could be against that?
Alas, there is no free lunch with subsidy programs. The EITC has a high error and fraud rate, and for most recipients it creates a disincentive to increase earnings.
The waste and the “disincentive effects” are the things that bother me the most. The phase out of the benefits makes it very expensive to earn a little more, after a certain low-income point. My computation of the Iowa marginal rates on EITC recipients is in chart:
That’s a 55% tax on every dollar earned, which doesn’t exactly encourage you to earn more dollars. And I don’t try to account for the hidden tax resulting from the loss of other welfare benefits as income increases.
Unfortunately, the study doesn’t really address what should replace the EITC, other than calling for generic good tax policy: “For example, cutting the corporate income tax rate would boost business capital investment. That would generate higher demand for labor, and thus raise wages and create more opportunities for American workers over time.”
I wish they had discussed the “universal benefit” that Arnold Kling and others have set forth. Arnold describes this version:
For a universal benefit, I propose something like $6000 for each adult in a household and $4000 for each child. [Charles] Murray proposed $10,000 per adult and zero per child.
Murray described the program as a cash grant. I describe it as flex-dollars that can only be used for “merit” goods, meaning health care, food, housing, and education.
Each of us presumes that people will purchase health insurance. I am explicit that catastrophic health insurance would be mandatory.
I propose something like a 20 percent marginal tax rate, or phase-out rate, for the universal benefit.
Arnold would have the phase-out as an addition to the income tax; I would couple it with the standard deduction so it phases out as part of the income tax, not as an addition to it. In any case, it would address many of the fraud and administration problems we see in the EITC.
Robert D. Flach has your fresh Friday Buzz! Last minute filing, neglected beneficiary designations, and Dance Moms are highlighted.
Laura Saunders, Beware of Tax Surprises Lurking in Mutual Funds (Wall Street Journal). “Here’s why: By law, each year mutual funds must pay out to investors nearly all their income, which includes interest, dividends and net realized capital gains—in short, the profits on their trades minus offsetting losses… Already, one fund has announced the largest capital-gains payout some experts can remember.”
Annette Nellen, Worker Voice, Classification and Taxes. “One of many things the “on demand” economy means is more clear and consistent rules on worker classification.”
Jason Dinesen, Glossary: S-corporation. “S-corporation is a tax term that refers to a corporation or an LLC that elects to be taxed under the rules of Subchapter S of the Internal Revenue Code.”
Jim Maule, Taxes, Consumption, Soda, and Obesity. “It is not unlikely that people who find soda to be too expensive because of the tax will spend their dollars on pies, cakes, candy, doughnuts, cookies, ice cream, and similar items.”
Leslie Book, Tax Court Holds Preparer Who Placed Truncated Social Security Number on Returns Subject to Penalties. He didn’t use a PTIN or Social Security Number on the returns he signed. The penalty is $50 per return. He prepared 134 returns in 2009. I’ll leave the math as an exercise for the reader.
TaxGrrrl, ‘Dance Moms’ Star Abby Lee Miller Accused Of Hiding Income, Indicted On Fraud Charges. So many TV shows I’ve never seen, so many indictments.
They both eat brains. Presidential candidate debates outdraw zombies (Kay Bell)
Howard Gleckman, The Debt Limit: Here We Go Again (TaxVox):
The House is largely leaderless and a significant minority of its Republican caucus will oppose any increase in the federal borrowing limit. In the Senate, CNN reports that GOP leader Mitch McConnell wants major concessions from the White House on such hot button issues as Social Security and Medicare before he moves a debt bill. And a lame-duck President Obama seems increasingly disinclined to negotiate with Hill Republicans on any issue.
Pass the popcorn.
Jeremy Scott, Democrats Offer Nothing Much on Tax Reform (Tax Analysts Blog):
Taxes were discussed. Bernie, of course, wants to use them to reduce the gap between the rich and the poor, something it’s not clear his plan even addresses. Chafee wants a new 45 percent bracket on higher incomes. And Hillary talked some about the numerous small tax provisions she would like to enact to accomplish extremely specific, targeted goals. But nothing said onstage Tuesday night should give any tax reform observers hope that a Democratic White House in 2017 will be any more behind a broad tax reform effort than President Obama has been.
A complicated tax code that meddles in everything is exactly what you would expect from big government fans. There’s no reason to expect reform from the avowed party of big government.
Kyle Pomerleau, Governor Lincoln Chafee’s Modest Tax Proposal (Tax Policy Blog).
Bob McIntyre, Although He Left out Key Details, It’s Clear Kasich’s Tax Plan Is a Deficit-Busting Giveaway to the Wealthy (Tax Justice Blog). We don’t need no stinking key details.
TaxProf, The IRS Scandal, Day 890
News from the Profession. Will the CPA Exam Become Optional? (Caleb Newquist, Going Concern)
6,000 Sq. Ft., Handyman’s and Ordnance Clearance Specialist’s Dream! The IRS is going to once again try to auction the home of Ed and Elaine Brown, the couple serving loooong prison terms as a result of an armed standoff following their conviction on tax charges. It has some unusual features, reports WMUR.com:
In the back of a closet, a hidden door can be found. A ladder leads to a small bunker with a passageway that leads just outside. Dirt hides the manhole cover that provides an exit to the passage.
Admit it, you’ve always wanted one of those.
“There’s a lot of stuff that you need to look at and say, ‘Do I want to finish it that way? Do I want to go a different direction?'” said Roger Sweeney, liquidation specialist for the IRS. “But it also comes with 100 acres, and with that price, it’s a heck of a deal.”
There are solar panels and a wind turbine on the land, but investigators have found explosive devices, as well. A warning is included in the notice of sale.
The article has a little photo tour of the property. You can learn more at the IRS auction website. The starting bid is only $125,000.
Related: Tax Update Blog Ed Brown coverage.