Just as a rose by any other name would still smell just as sweet, so welfare by any other name still reeks of dependency, taxation, wealth redistribution, fraud, redundancy, inefficiency, and income- transfer payments. Yet, pleas to maintain the welfare state never cease. And some even want to expand it.
Like MDRC, “a nonprofit, nonpartisan education and social policy research organization dedicated to learning what works to improve programs and policies that affect the poor.” The organization works “as an intermediary, bringing together public and private funders to test new policy-relevant ideas, and communicate what we learn to policymakers and practitioners — all with the goal of improving the lives of low-income individuals, families, and children.” It is funded by “government agencies and some 70 private, family, and corporate foundations.”
According to MDRC, “In recent decades, wage inequality in the United States has increased and real wages for less-skilled workers have declined. As a result, many American workers are unable to adequately support their families through work, even working full time.” The Earned Income Tax Credit “has helped to counter this trend and has become one of the nation’s most effective antipoverty policies.” It has “helped to counteract decades of stagnating or even falling wages for the bottom part of the wage distribution, increasing employment among single mothers and raising millions of families and children out of poverty.”
But that is not enough. The tax credit “could do more.” Heretofore “most of its benefits have gone to workers with children.” “Low-income workers who do not have dependent children” have been “left out” of the tax credit’s reach. That includes “young men and women just starting out, older workers with adult children, and parents who do not have custody of their children.” All of them “have faced the same falling wages over the past decades as workers with children, and the same tough labor market of more recent years, and all could benefit from an expanded tax credit.” That “single people working in low-wage jobs are treated differently from those with children raises questions of equity.”
Enter Paycheck Plus, a program that “provides a bonus of up to $2,000 at tax time” to low-income workers without dependent children and “tests the effects of a much more generous” and “expanded” Earned Income Tax Credit. The program “is being evaluated using a randomized controlled trial in two major American cities: New York City and Atlanta.” Preliminary findings have been published in an MDRC report titled “Expanding the Earned Income Tax Credit for Workers without Dependent Children: Interim Findings from the Paycheck Plus Demonstration in New York City.” Since the program is based on, and seeks “to mirror the process by which filers apply” for, the Earned Income Tax Credit, it is imperative that this credit be examined in detail. But first, it is necessary to look at tax credits in general.
Tax deductions and exemptions serve to reduce one’s income subject to tax.
Exemptions and deductions work the same way, but deductions are generally subject to more limitations, conditions, and exclusions. In either case, taxpayers will pay less in taxes the greater the number, and the greater the amount, of exemptions and deductions that they qualify for.
All taxpayers can generally claim personal exemption of $4,050 for themselves and their dependents and a standard deduction of $6,350 ($12,700 for married filing jointly). Many taxpayers can also claim deductions for educator expenses, business expenses of performing artists, health savings account contributions, alimony paid, moving expenses, the deductible part of the self-employment tax paid, health-insurance premiums paid by the self-employed, IRA contributions, tuition and fees paid, and student-loan interest. Taxpayers who choose to itemize can claim deductions for medical and dental expenses, state and local taxes paid, real estate taxes paid, home mortgage interest, mortgage insurance premiums, charitable contributions, casualty or theft losses, unreimbursed employee expenses, and tax preparation fees.
All applicable deductions and exemptions are subtracted from one’s total income before the amount of one’s taxable income is calculated. Tax deductions and exemptions are not subsidies like welfare, government spending that has to be paid for, or loopholes that need to be closed. They are always good no matter how many of them there are, what the amounts of them are, whom they benefit, why they are enacted, or how much they “clutter up” the tax code. They are always good because they allow Americans to keep more of their money in their pockets and out of the hands of Uncle Sam.
Tax credits, of which there are two types, work differently, although both types serve to reduce the amount of tax owed on one’s income. A regular tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Like tax deductions and exemptions, one will pay less in taxes the greater the number, and the greater the amount, of tax credits that one qualifies for. Current tax credits include the credit for child and dependent care expenses, adopting a child, education credits, the foreign tax credit, the retirement savings contributions credit, the Child Tax Credit, the Earned Income Tax Credit, the plug-in electric vehicle credit, and residential energy credits. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. Tax credits, like tax deductions and exemptions, are always a good thing because they allow Americans to keep more of their money in their pockets and out of the government’s hands.
However, unlike regular tax credits, refundable tax credits are a form of welfare, even though they are rarely viewed as such. A refundable tax credit is treated as a payment from the taxpayer, such as federal income tax withheld or estimated tax payments. If the tax credit “payment” is more than the tax owed after the regular tax credits are applied, then the taxpayer becomes a tax receiver. He receives a refund of the money he never actually paid in. The money is simply taken from real taxpayers and transferred to him. Refundable tax credits are the ultimate form of welfare because they are payments made in cash like the Temporary Assistance to Needy Families (TANF) or Supplemental Security Income (SSI) programs, instead of payments made to a third party, like Medicaid, or deposited on an Electronic Benefit Card (EBC), as in SNAP (the food stamp program). Refundable tax credits include the Additional Child Tax Credit, the American Opportunity Tax Credit, and the Earned Income Tax Credit.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is the king of refundable tax credits. The Additional Child Tax Credit (ACTC) is worth, at the most, $1,000 per child, and is available only to taxpayers with a qualifying child who receive less than the full amount of the $1,000 Child Tax Credit. In that case, the amount of the ACTC is the smaller of the remaining child tax credit and 15 percent of the taxpayer’s taxable earned income above $3,000. The American Opportunity Tax Credit (AOTC) is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student. Only 40 percent (up to $1,000 per student) of the AOTC is refundable. But the EITC can result in a payout of $6,318 for taxpayers with three or more qualifying children.
The EITC is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. Although the EITC is a tax credit, for many of its recipients it functions as a gigantic income-transfer payment because it is fully refundable; that is, its size is neither determined by a recipient’s income tax liability nor limited by a recipient’s assets. The actual amount of EITC benefit depends on a recipient’s income and number of children. The difference between the EITC and other forms of “income support” is that it is received in one large payment after the end of the tax year instead of in monthly payments like food stamps, Social Security, WIC, SSI, and TANF. The EITC is the third-largest social welfare program in the United States after Medicaid and food stamps. The number of taxpayers claiming the credit increased 50 percent from 1999 to 2013, and the total amount claimed (after adjusting for inflation) increased 60 percent. One in five households filing a federal income tax return now claims the EITC.
According to the IRS,
The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file. EITC reduces the amount of tax you owe and may give you a refund.
To qualify for EITC you must have earned income from working for someone or from running or owning a business or farm and meet basic rules. And, you must either meet additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.
The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status.
The EITC is a refundable tax credit. This means workers may get money back, even if they have no tax due. Nationwide last year more than 27 million eligible individuals and families received almost $67 billion in EITC.
The EITC was introduced for tax year 1975. It provided low-income taxpayers with a refundable credit as high as $400. The program received wide bipartisan support in Congress and was soon expanded and made a permanent fixture on IRS tax forms. By 1990, the maximum EITC was $953, with a partial benefit available for incomes less than $20,264. In 1990, the system was greatly expanded with higher benefits and more money awarded if the taxpayer had two or more children. By 1993, the maximum credit was $1,511. It doubled the next year. Also new in 1994 was a credit for a single person with no dependents. The EITC amounts have increased every year since then. Beginning in 2009, the credit was increased for taxpayers with three or more children. From 1979 to 2010, qualified workers could receive a portion of their EITC payments in their paychecks spread throughout the year and then receive the rest after they filed their tax returns. Employers would then recover the advances by an offset against their quarterly payments to the IRS of payroll and withholding taxes. Although the Advanced Earned Income Credit (AEIC) was available to workers as long as they filed a W-5 form with their employers every year, the utilization rate among claimants never exceeded 2 percent.
To be eligible for the EITC, one’s income must be below certain limits. For tax year 2017, both earned income and adjusted gross income must each be less than
- $15,010 ($20,600 married filing jointly) with no qualifying children
- $39,617 ($45,207 married filing jointly) with one qualifying child
- $45,007 ($50,597 married filing jointly) with two qualifying children
- $48,340 ($53,930 married filing jointly) with three or more qualifying children.
For tax year 2017, the maximum EITC that one can receive is
- $510 with no qualifying children
- $3,400 with one qualifying child
- $5,616 with two qualifying children
- $6,318 with three or more qualifying children.
To receive the maximum credit, one’s income must be between
- $6,670 and $8,340 ($13,930 married filing jointly) with no qualifying children
- $10,000 and $18,340 ($23,930 married filing jointly) with one qualifying child
- $14,040 and $18,340 ($23,930 married filing jointly) with two or more qualifying children.
There are also some stipulations and restrictions regarding the EITC:
- Filing status cannot be married filing separately.
- Investment income must be $3,450 or less for the year.
- No income received for work performed while an inmate can be used to claim the EITC.
- A claimant must be either a U.S. citizen or resident alien.
- Qualifying children must be younger than 19 (or 24 if a full-time student).
- Those with no qualifying children must be 25 to 64 years old.
- Filers must have lived in the United States for more than half the tax year.
- All filers and all children being claimed must have a valid Social Security number.
In addition to the federal EITC, twenty-six states and the District of Columbia also have an EITC program. And the EITC in those states is also refundable, except in Delaware, Maryland, Ohio, Oklahoma, and Virginia. But that’s not all; EITC benefits don’t affect other welfare benefits. According to the IRS,
Refunds received from the EITC or any other tax credit are not used to determine eligibility for any federal or federally funded public benefit program such as Medicaid, Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (food stamps), low-income housing or most Temporary Assistance for Needy Families (TANF) payments. Those who save their tax credit for more than 30 days should contact their state, tribal or local government benefit coordinator to find out if their benefits count as assets.
As mentioned above, a Paycheck Plus trial program is currently under way in New York City and Atlanta. Funding for the project in New York was provided by some foundations, the New York City Mayor’s Office for Economic Opportunity, and the U.S. Department of Health and Human Services. Funding for the project in Atlanta was provided by some foundations and the U.S. departments of Health and Human Services and Labor. Interim findings from the project in New York City were published in a report by MDRC.
Between September 2013 and February 2014, MDRC partnered with Food Bank for New York City (FBNYC), which runs the largest network of Volunteer Income Tax Assistance (VITA) sites in the city, to recruit a little more than 6,000 low-income, single adults without dependent children to take part in the study, all of whom had earned less than $30,000 in the previous year. Half were selected at random to be offered a Paycheck Plus bonus for three years, starting with the 2015 tax season, based on earnings in the previous year. Participants had to apply for each bonus. About 64 percent of those who had earnings in the eligible range received bonuses in the first year (2015), while 57 percent received bonuses in the second year (2016). The average amount received was $1,400.
The report examined Paycheck Plus’s effects over the 2015 and 2016 tax seasons on income, work, earnings, tax filing, and child support payments. Paycheck Plus
- increased after-bonus income (earnings plus bonuses) in both years
- increased tax filing in both tax filing seasons
- increased the payment of child support in 2015
- increased employment in 2015 for most types of participants.
The findings “are consistent with research on the federal EITC showing that an expanded credit can increase after-transfer income and encourage employment without creating work disincentives.” Later reports will examine effects after three years, in both New York City and Atlanta.
Paycheck plus welfare
It is no surprise that the Paycheck Plus program increased income, tax filing, child support payments, and employment. How could it not? Getting hundreds of dollars in free money is always a great incentive for people to do just about anything. So of course the findings “are consistent with research on the federal EITC showing that an expanded credit can increase after-transfer income and encourage employment without creating work disincentives.” But should the federal EITC program be expanded for low-income, single adults without dependent children like those who participated in the Paycheck Plus trial program? Should the similar state programs be expanded for them? Should single people working in low-wage jobs be treated differently from those with children?
The tax code has always benefited families over individuals by means of exemptions, deductions, and credits for children, adoption expenses, and child-care expenses. The EITC merely continued the practice. A 2016 Government Accountability Office report (GAO-16-475) to Congress on refundable tax credits pointed out that “Congress enacted the EITC in 1975 to offset the impact of Social Security taxes on low-income families and encourage low-income families to seek employment rather than public assistance.” A small EITC payment for a single person with no dependents was not even introduced until 1994.
The EITC program is also rife with fraud. The IRS each year issues a list of common tax schemes called the “Dirty Dozen.” One of them relates to the EITC: “Some people falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually in order to maximize refundable credits.” The IRS has estimated an EITC improper payment rate of about 22 to 26 percent for 2016. That translates into a dollar range of $15.5 to $18.1 billion.
Not only should the EITC program not be expanded for low-income persons without dependent children, it should be eliminated for them and for families as well. A program that is itself welfare cannot discourage people from receiving welfare. Low-income individuals and families don’t need a tax credit when they generally pay no federal income tax in the first place. The inequity in the EITC program is not that individuals don’t receive the same benefits as families, but that the tax refunds that everyone in the program receives are refunds of other people’s money.
The EITC is an income-transfer program masquerading as a tax credit. That is true whether it is provided on the federal, state, or local level. And it is true no matter what it is called. Any addition to one’s paycheck that is not earned, provided by a private organization, or provided by one’s employer is Paycheck Plus welfare.
This article was originally published in the January 2018 edition of Future of Freedom.