The Earned Income Tax Credit is Riddled with Errors and Fraud

Each year for decades, 20 cents or more of every EITC dollar has been given to the wrong person.

BY KEN BRAUN

What they said:

The newspaper (formerly the San Jose Mercury News) posted this news report about a proposal from Congressman Ro Khanna, D-Santa Clara, that would “drastically expand the Earned Income Tax Credit, which helps people at the bottom end of the salary range.”

“The credit was first introduced in 1975 as a way to incentivize low-income people to find work and stay off of welfare,” continues the newspaper’s attempt to describe the EITC. “It has been expanded over the years, and most economists — both liberal and conservative — see the credit as a successful policy to boost low wages.”

Similar to the above, this opinion piece from Gene B. Sperling, The Atlantic’s contributing editor and a former economic policy advisor to Presidents Clinton and Obama, advocates an “EITC for All” program. He proposes a large increase in the payments to workers that have no children.

“As the Trump Administration and Congressional Republicans attempt to portray a tax plan slanted to the top 1 percent as “middle-class” tax relief, it’s worth asking what actual tax relief for American workers would look like,” says Sperling. “Among the ideas that should be at the top of the list should be expanding the Earned Income Tax Credit (EITC), a policy that provides millions of low-income American workers with up to a few thousand dollars when they file their taxes.”

What should be said…

The EITC has been riddled with fraud and huge errors for many decades. It is not a “tax relief” program, but rather a government cash assistance program for low-income workers, paid for by all other American income taxpayers.

The EITC is a refundable tax credit – a cash payment sent from the federal government to lower income workers whether they pay federal income taxes or not. A 2015 Cato Institute Tax & Budget Bulletin pegged the price of that year’s EITC transfer payments from federal income taxpayers to non-taxpayers at $60 billion. It is therefore a government spending program, paid for by the American families and businesses that do pay taxes.

Each year for decades, 20 cents or more of every EITC dollar taken from American taxpayers has been given to the wrong person. The Cato report explains:

A major weakness of the EITC is the program’s high rate of overpayments, which are caused by math errors, misunderstanding of the rules, and fraud. The EITC error rate has been more than 20 percent since at least the 1980s. The Internal Revenue Service reports that the EITC error and fraud rate in 2014 was 27 percent, which amounted to $18 billion in overpayments.

The EITC is a deceptively large program, so just the error and fraud fee for those 2014 overpayments equaled about $240 for every household of four not receiving EITC benefits. (Overall, the entire cost of the EITC program in 2014 – waste and all – was more than $800 for every household of four not receiving benefits.)

The overpayment problem has existed for decades because the EITC is a particularly easy program to both cheat and misunderstand. According to Cato:

The EITC is an easy target for dishonest filers because it is refundable, meaning that people can simply file false tax returns and see if the Treasury sends them a check. Errors and fraud also plague the other large refundable credit, the child tax credit (CTC). The improper payment rate for the CTC is more than 25 percent, thus wasting about $6 billion a year.

Part of the problem with the EITC is that unscrupulous tax preparation firms prey on unsuspecting workers, including many immigrants who have poor English skills. For a fee, firms help workers file claims, and they also provide loans in anticipation of EITC refunds. Typically, half of the EITC tax returns completed by paid preparers overclaim the credit.

It is remarkable that the EITC error and fraud problems have persisted for so long, despite the many efforts to fix them. This is one good reason to cut or end the EITC. It is unfair to the taxpayers who fund the program for the government to misspend so much of their money year after year.

Cato also demonstrates the “efforts to fix” the EITC have led IRS auditors to come down hardest on the low-income working Americans the program was intended to help:

The credit is so problematic that 39 percent of all IRS audits under the individual income tax are done on EITC filers. Without the EITC, the IRS would have little reason to audit low-income filers. And EITC audits are particularly time-consuming because of often unclear correspondence with tax filers and the need for multiple phone calls.

…the rules are so complicated that more than two-thirds of all tax returns claiming the EITC are done by paid preparers. That costs money, and so do the fees that are charged to many EITC claimants who receive refund anticipation loans. All in all, the EITC has led to the creation of tax-preparation industry of more than $3 billion annually in fee revenue.

The news report from The Mercury News and the commentary in The Atlantic posted above failed to note any of these very critical facts about the EITC. This oversight is not unique to these publications, but is instead a pervasive mistake made by the majority of media reporting and commentary about the program. It’s likely and ironic that the media’s rate of failure to report on the very large EITC erroneous payment rate exceeds even the EITC overpayment rate.

When American taxpayers and low-income American workers are provided media accounts regarding plans to expand this very troubled government program, they should be provided with relevant facts regarding how a huge chunk of the spending over many decades has poorly served both intended beneficiaries and the people paying the bills.

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Further reading…

Earned Income Tax Credit: Small Benefits, Large Costs – Cato Institute Tax & Budget Bulletin #73, by Chris Edwards and Veronique de Rugy.

In Our Hands: A Plan to Replace the Welfare State – American Enterprise Institute scholar Charles Murray proposes that the amount we currently spend on all social welfare, corporate welfare and income support programs – including the EITC – could be more effectively spent if we did away with all of it (and the bureaucracies that administer it all) and merely distributed $13,000 each year to every adult over the age of 21. His proposal would permit everyone to work as much as they wish, but would impose a graduated surtax to progressively recapture some of the government stipend only after an individual’s income reached $30,000 in excess of the annual stipend. Murray calculates the cost of this program would be $200 billion cheaper that current spending and would eliminate many of the current social problems and fraud we experience with bureaucratically targeted welfare spending.

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Ken Braun is the director of policy and communications for Think Freely Media. He has served as a public policy and communications professional for four different free market policy organizations, and as a chief of staff in the Michigan Legislature. He has also been a freelance political columnist for one of Michigan’s largest newspaper chains. Ken can be followed on Facebook, and when he has something really clever to say he will even use Twitter.

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What Should Be Said shows effective ways of communicating freedom principles by using a storytelling approach, taking the moral high ground, and staying hopeful and aspirational. Media, politicians and thought leaders often fail to include the freedom perspective at all by omitting critical facts. Alternatively, when they do make a sincere attempt to sell the freedom philosophy, they often do so with a stale and defensive approach that is missing stories that humanize the dry facts and figures. Here we show examples of how storytelling and emotionally compelling changes in message will make all the difference for those trying to advocate for liberty.

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