Q&A: Earned Income Tax Credit
With U.S. Senator Chuck Grassley
Q: What is the Earned Income Tax Credit (EITC)?
A: The EITC is an anti-poverty program that uses the federal tax code as a vehicle to put cash benefits directly into the pockets of the working poor. Unlike other government spending programs where assistance for poor and low-income families is filtered through layers of bureaucracy, the EITC encourages people to get and keep a job. It is intended to foster personal responsibility by giving those on the lowest rungs of the labor pool an extra incentive to jump in and stay in the workforce. By bumping up the value of a paycheck, this policy aims to bump people from the public welfare rolls to an employer’s payrolls. The EITC helps lower-income breadwinners who work hard to stretch their paychecks and yet still find it hard to get ahead. Eligible taxpayers who earn a living through wages, salary or self-employment may qualify for “cash back” through the federal tax credit to help make ends meet. Unlike other forms of federal welfare programs that distribute public assistance through food stamps or housing subsidies, the EITC is based on a simple principle, to reward those who work hard and play by the rules. Many consider the EITC a better tool for raising the incomes of the working poor, instead of, say, raising the minimum wage, which can lead to employers making do with fewer workers on their payrolls. Last year 28 million tax filers received $66 billion in refundable tax credits through the EITC. The average tax refund for qualifying taxpayers runs about $2,300.
Q: What shortcomings exist with the EITC?
A: The Government Accountability Office (GAO) recently released figures that illustrate one of the downsides when Uncle Sam opens up the federal checkbook: improper payments. These are payments that should not have been made or were made in the incorrect amount. According to the GAO, the federal government last year made $124.7 billion in improper payments. That’s a $19 billion increase from a year earlier. The GAO attributes the spike primarily to payment discrepancies in Medicare, Medicaid and the Earned Income Tax Credit. In fact, the EITC alone improperly paid out $17.7 billion. To hard-working taxpayers, penny-pinching families and bottom line-minded small business owners, the extent of government mismanagement and misspending is tough to swallow. To be sure, the federal bureaucracy’s fiscal accountability gap widens the credibility gap among the public. Considering the mounting size of the national debt and impending insolvency of the public retirement programs, the federal bureaucracy must run a tighter fiscal ship. Beyond improving the fiscal integrity of the EITC, this program also falls victim to a pervasive problem threaded throughout the federal tax code. It is often too doggone complicated for taxpayers to figure out. The IRS has formulated a bewildering set of rules and requirements that make compliance tricky to achieve. And arguably, that leads to billions of dollars of improperly paid refunds.
Q: How would the President’s recent executive order on immigration affect the EITC?
A: The IRS recently indicated that it would retroactively extend EITC eligibility to about four million undocumented workers who would fall under the President’s executive order announced last November. In yet another glaring example of unconstitutional executive overreach, the President issued a sweeping decision that essentially seized unilateral authority of the nation’s immigration laws. His executive order would allow millions of immigrants in the country illegally to apply for work permits and receive Social Security numbers. According to the IRS, these previously undocumented workers could file amended tax returns for the previous three tax years. As a result, the EITC spending tab would explode. The non-partisan, official estimator, the Joint Committee on Taxation, calculates that it could cost taxpayers an additional $2.1 billion, covering 800,000 tax returns, over 10 years. And that’s just for EITC payments that would be made to individuals based on earnings from unauthorized work in the United States as a result of the President’s executive action. Beyond the fiscal pressures already bleeding the federal budget into a sea of red ink, the notion that millions of people who were working here illegally would now qualify for hundreds of millions of dollars in tax refunds sends the wrong message to our law-abiding society. The President seems to be mistaking his presidential pen for a magic wand. But the President’s fairy tale doesn’t have a happy ending for taxpayers who play by the rules. The reality is that Congress specifically determined that the EITC should be “denied to individuals not authorized to be employed in the United States” with passage of the Personal Responsibility and Work Opportunity Act of 1996. That’s why I’m advancing legislation that would deny those in the country illegally from claiming EITC benefits for any year they worked without legal authorization in the United States. This would uphold the policy Congress implemented in 1996. It also would square with reality to which people in the public square relate. The federal tax code shouldn’t reward those who snubbed the rule of law, including our nation’s immigration, tax and employment laws.