The Center's work on 'Earned Income Tax Credit' Issues

A Double Standard on Tax Compliance

February 13, 2015 at 1:23 pm

House Ways and Means Committee Chairman Paul Ryan suggested recently that Congress should expand the Earned Income Tax Credit (EITC) for childless adults and non-custodial parents and fully offset the cost by reducing EITC overpayments.  But he and other House Republicans voted today to permanently extend an expensive small-business tax break without offsetting the cost, such as by requiring any improved compliance in that part of the tax code — where the rates of error and loss to the Treasury far outstrip those for the EITC.  The IRS estimates that a stunning 56 percent of business income that individual returns should have reported went unreported in 2006, the latest year for which these data are available.

These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue.

During a Ways and Means Committee hearing, Ryan praised the EITC’s proven effectiveness in promoting work and reducing poverty and alluded to his proposal to expand the tiny EITC for childless workers — the lone group that the federal tax code actually taxes into (or deeper into) poverty and a group that needs the EITC’s pro-work income boost and incentives.  Ryan’s proposal to expand the childless workers’ EITC is nearly identical to one from the President, which would seem to make it ripe for bipartisan legislative action.

But Chairman Ryan seemed to suggest the need to generate offsetting savings within the EITC to pay, on a dollar-for-dollar basis, for the EITC change.  To be sure, Congress can and should take important steps to reduce EITC errors, including:  1) providing the IRS more adequate funding for enforcement; 2) giving the IRS the authority to regulate paid tax preparers to ensure they meet basic competency standards (a majority of EITC errors occur on commercially prepared returns); and 3) enacting a battery of measures the Treasury has proposed to reduce EITC errors.  Yet Congress has cut IRS enforcement funding heavily since 2010.  It also has failed to approve the Administration’s request to empower the IRS to take steps to significantly reduce errors by commercial tax preparers.

Further, the Joint Tax Committee is understandably cautious about “scoring” various measures to reduce errors on tax returns, whether they concern the EITC or other parts of the tax code.  The combined scored savings from all known legislative proposals to lower EITC errors fall well short of the costs of expanding the EITC for childless workers.  This raises a concern that lawmakers could propose measures to cut the EITC for honest low-income working families and misleadingly promote them as cutting “fraud, waste and abuse” when that’s not what they would do.  Sadly, some members of Congress have done just that in the past.

The small-business legislation that the House approved today would make permanent a generous tax break (known as “Section 179” expensing) for certain small-business investments.  Business income on individual tax returns is, by far, the largest source of tax non-compliance with, as noted above, an estimated 56 percent of this income unreported in 2006.  This resulted in an estimated tax gap of $122 billion, more than four times the gap due to all individual income tax credits (including the EITC).

A dollar is a dollar, whether it’s spent subsidizing small businesses or supplementing the wages of a low-wage worker striving to get a toehold in the economy.  Policymakers should work to improve compliance throughout the tax code.  And they should stop applying double standards to the effort.

Greenstein on the Obama Budget

February 2, 2015 at 11:47 am

CBPP President Robert Greenstein just issued a statement on the President’s fiscal year 2016 budget.  Here’s the opening:

 President Obama is proposing a surprisingly ambitious budget that would make progress — in some cases modest, in others large — in various areas in which policy sclerosis has prevented the nation from addressing significant problems.  It would expand opportunity, especially for children; reform various programs and tax incentives to make them more effective; and help large numbers of middle- and low-income families while scaling back inefficient tax shelters that mainly benefit those at the top.

The budget should also strengthen economic growth.  It would curb tax-driven economic distortions and invest part of the savings in initiatives that should make the labor force larger and more productive, such as pre-school education and child care, improved college access, stronger tax incentives for people to work, and much-needed infrastructure investments.

Along with financing such investments, the plan would use some of the new revenue and program savings for deficit reduction.  It would make modest but useful progress here, providing more than $1 trillion in deficit reduction over the next ten years (not counting the savings from winding down overseas wars).  In essence, the plan reflects the judgment, with which we concur, that the nation faces two kinds of serious deficits — in the long-term fiscal arena, but also in crucial areas that need resources.

Despite its investments, however, this is not a “big-spending budget,” contrary to some claims.  Total federal spending over the next ten years would average 21.75 percent of gross domestic product (GDP) — identical to the average for the Reagan years.  In fact, despite the budget’s proposals to ease the sequestration budget cuts, discretionary spending would fall by 2019 to its lowest level on record as a share of GDP, with data back to 1962.  So would non-defense discretionary spending.

Overall, the budget is rather bold, with an unusual number of major new proposals for a President’s seventh budget.  It includes major reforms in such programs as unemployment insurance and crop insurance, as well as in the tax code and immigration, and measures to push federal agencies to conduct more evaluation, collect more data on program effectiveness, and make more evidence-based decisions.

Click here for the full statement.

Previewing the Obama Budget’s Tax Proposals

February 2, 2015 at 9:34 am

Below are some key facts and resources about some tax proposals we expect the President’s budget to include.  Stay tuned for more analysis once the budget is released this morning.

Reforming Capital Gains Taxes

The tax code strongly favors income from capital gains — increases in the value of assets, such as stocks — over income from wages and salaries.  These preferences are both economically inefficient and highly regressive.  The President’s budget will include recently released proposals to address these problems by: 1) applying the capital gains tax to large, “unrealized” capital gains that wealthy individuals leave behind when they die; and 2) narrowing the differential between the top capital gains rate and the top tax rates on earned income by returning the capital gains rate to its level under President Reagan.

For more, see:

Strengthening Tax Credits for Working Families

As in last year’s budget, the President will propose extending the pro-work and anti-poverty effects of the Earned Income Tax Credit (EITC) to low-income workers not raising minor children, the lone group that the federal tax system taxes into poverty.

He will also call for permanently extending key provisions of the EITC and the Child Tax Credit slated to expire at the end of 2017; more than 16 million people (including nearly 8 million children) will fall into — or deeper into — poverty if they expire.

In a rare sign of possible bipartisan agreement, House Ways and Means Chairman Paul Ryan last year offered a proposal to expand the EITC for childless workers that’s almost identical to the Obama proposal.

For more see:

Giving the IRS More Adequate Funding

Significant cuts to IRS funding in recent years have compromised taxpayer service and weakened enforcement of the nation’s tax laws.  As in last year’s budget, we expect the President’s budget to restore more adequate funding for this essential agency.

For more, see:

Reforming Corporate Taxes

The tax code tax encourages multinational corporations to shift investments and U.S.-earned profits to foreign tax havens.  The President’s budget is expected to reiterate his previous calls for corporate tax reform that reduces those incentives while broadening the tax base, as well as including new proposals to reform the international tax system.

For more, see:

Raising Tobacco Taxes to Invest in Early Childhood Education

The President has called for expanding preschool education.  His last budget proposed to finance it by raising the federal excise tax on tobacco products.  Tobacco taxes are a proven strategy to reduce smoking, particularly among teenagers and low-income people, and reducing smoking rates would generate substantial health gains.

For more, see:

Helping Eligible Workers Claim the EITC

January 30, 2015 at 11:18 am

Some 21 percent of workers who qualify for the Earned Income Tax Credit (EITC) don’t claim it, the IRS estimates, and the IRS and its partners have designated today as the 9th annual EITC Awareness Day to spread the word about the EITC through public events and engaging the media.

As our Working-Family Tax Credit Essentials series explains, the EITC and Child Tax Credit reward work and reduce poverty. Research also shows that they help people in working families at every stage of life, from infancy through retirement.

CBPP conducts a National Tax Credit Outreach Campaign to promote the tax credits and provide free tax filing assistance year-round.  The campaign consists of thousands of community and social service organizations, government agencies, and employers working together to inform potentially eligible workers about the EITC, how to claim it, and where to find free tax filing assistance.

The campaign website has several resources, including:

Visitors can also request a complimentary copy of the Tax Credit Outreach Kit in the mail.

Working-Family Tax Credit Essentials, Part 5: The Impact in Your State

January 27, 2015 at 4:08 pm

Previous posts in this series on our new chart book have explained that the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC):

Our chart book also includes fact sheets with by-state data on how the EITC and CTC reduce poverty, who benefits, and how state EITCs can supplement the federal credit.  The fact sheets also give state-specific data on the impact of making the key EITC and CTC provisions permanent and of strengthening the EITC for childless adults.  Click on a state below for its fact sheet.