A credit to the tax code
By Charles Lane
Republicans and Democrats don’t agree on much these days, but if there’s one thing they should still agree on, it might be the federal tax credit. on labor income. This cash wage supplement, issued as a tax refund, was created under the Ford administration and was gradually expanded under Republican and Democratic presidents. In 2012, it was $63 billion, paying an average of $2,300 to households of 27 million people.
The EITC subsidizes low-income workers who make the effort to find a job and employers who hire them without wasting benefits on middle-income teenagers and other non-poor workers, as minimum wage does. In fact, the growth of this tax credit has largely compensated for the stagnation of the inflation-adjusted minimum wage in recent years.
Many conservatives have cited the tax credit, rightly, as a more effective, market-driven approach to tackling poverty and inequality than the minimum wage, which Democrats have sought to raise.
So how come the new tax reform plan from the top Republican drafter of tax legislation in Congress, House Ways and Means Committee Chairman Dave Camp, cuts the appropriation by $48.2 billion? between 2015 and 2018 and use the savings to help pay for a plan that lowers marginal tax rates, including for the wealthy?
Camp’s proposal would reduce the current maximum EITC benefit, from $6,143 for a two-parent family with three or more children, to $4,000 for a two-parent family with two or more children. And it would reduce the already insufficient credit coverage for single workers without children by reducing their maximum benefit from $487 to $100.
Camp’s plan was quickly criticized by Robert Greenstein of the Liberal Center for Budget and Policy Priorities, who noted that it could cost a single parent with two children who works full time at minimum wage around $350 in 2018 compared to current law.
At the Camp dump, households configured differently might fare better than Greenstein’s example; it mitigates changes to the EITC through a significantly more generous Child Tax Credit, which is also linked to wages and, therefore, work effort. Overall, his plan would slightly reduce taxes paid by those at the bottom of the income distribution.
There is a real problem with the current program: its complex eligibility criteria and poorly regulated deposit process lead to many people claiming and getting more money than they should – between 11 and 13 billion dollars in 2012, according to the Treasury Department. Inspector General, and over $130 billion over the past decade. Much of this was not due to an honest mistake, but to cheating by tax preparers, whose fees often depend on the amount of the refund or who lend clients money in anticipation of their checks.
Camp would tackle these overpayments – much of which is pocketed by middlemen, not low-wage workers anyway – by converting the earned income tax credit into a refund of employee’s social security.
According to a summary of the Joint Committee on Taxation provision, this “is both significantly simpler and more transparent than current law, with the potential for fraud reduced by the direct link to payroll taxes withheld on Form W- 2 of a taxpayer”.
The idea is smart and politically bold – perhaps too bold, as it could be interpreted as plundering a dedicated revenue stream from the Social Security trust fund. This fund is an accounting fiction, but it is a much appreciated accounting fiction.
Meanwhile, some 22% of potentially eligible workers never apply for an EITC due to the program’s daunting complexity, the Treasury Inspector General has found. Camp’s simplification could encourage more of them to sign up.
Yet he wouldn’t have had to do it without other provisions in his plan that primarily benefit corporations or the wealthy, like eliminating Obamacare’s medical device tax or maintaining preferential income treatment. investment for high earners.
A better approach would be to use the proceeds from the reduction in overpayments to maintain an earned income tax credit at least as generous as it is now, per recipient. If reducing overpayments is not enough, the money should come from elsewhere.
Camp deserves credit for taking over the hallowed cows of the tax code, such as mortgage interest deductions and state and local taxes that primarily benefit high-income taxpayers.
In addressing the Earned Income Tax Credit, however, the Ways and Means chairman had the opportunity to show the GOP’s seriousness about market-based approaches to the plight of low-income Americans — and none of it. didn’t quite take advantage of it.