When it comes to expanding the Earned Income Tax Credit, Billionaire Warren Buffett may be right in theory.
When it comes to expanding the Earned Income Tax Credit, Billionaire Warren Buffett may be right in theory. In practice? Not so much.
In a Wall Street Journal opinion piece posted last night, the world’s third richest man argued low wage workers would be better served by expanding the EITC than by increasing the minimum wage to the potentially job destroying level of $15. “The process is simple: You file a tax return, and the government sends you a check,” Buffett writes. “In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.”
(Photo by Bill Pugliano/Getty Images)
Certainly there’s room to increase the EITC for low wage childless workers– it now maxes out at just $503 for the childless and isn’t available at all for workers younger than 25. But there’s a compelling practical reason not to increase the credit for those with children now. Its already substantial size–as much as $6,242 for parents with three or more qualifying children and $5,548 for those with two kids–combined with pressure for the Internal Revenue Service to administer the credit on the cheap, has set off a tsunami of identity theft tax fraud that has swamped both the IRS and some of the very workers the EITC is supposed to help.
As Keith Fogg, a Forbes contributor and director of the Villanova Law School’s low income tax clinic, testified before the Senate Finance Committee in March:
“ Refundable credits, used to benefit low income taxpayers, bring out identity thieves and fraudulent preparers who prey on low income taxpayers and the IRS. The actions of these thieves, bad preparers and fraudulent preparers draw low income taxpayers into the controversy system and greatly complicate their lives. Once the IRS begins the examination process, low income taxpayers must react appropriately to a host of letters and notices that bewilder them.”
Even for those who aren’t bewildered by forms, getting through to the understaffed IRS takes a huge amount of time—time low wage workers struggling to raise kids and pull an extra shift at a fast food restaurant, don’t have. The result is that low income folks may give up their claims to the EITC when they’re victims of either identity thieves or an incorrect denial of the credit by the IRS (and yes, that happens a lot). “ Identity theft is challenging for anyone to deal with, but can just end up being an insurmountable barrier for the poor ,’’ Fogg testified.
Real life example: Forbes contributor Laura Shin wrote in 2013 about how a McDonald’s worker with fours kids lives on minimum wage and asked her whether she got help from the EITC. The woman’s response: “I was supposed to receive $3,167 for the Earned Income Tax Credit this year, but I didn’t file [my taxes] because I was a victim of identity theft”.
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In his opinion piece, Buffett doesn’t even mention identity theft, but does pay lip service to another problem with the EITC, “Fraud is a big problem; penalties for it should be stiffened,” he writes. Actually, penalties for fraud are already stiff and harsher penalties won’t make any difference.
For years, the IRS has estimated that about a quarter of the EITC payments it makes are issued incorrectly— the highest improper payment rate of any government program. Some of those “improper” payments result from honest confusion over who is a qualifying child and some from the intentional misreporting of income—both the understatement and overstatement of earnings can bring a bigger credit. But some of these supposed improper payments aren’t really improper at all. Outside of identity theft, a lot of what gets popularly branded EITC fraud really amounts to disputes about eligibility in which IRS auditors—not the low income taxpayers—are wrong. As Fogg notes, “Taxpayer Advocate Nina Olson has reported that in over 40 percent of the cases where the IRS examiners classified an EITC claim as invalid but her office got involved, the ruling was reversed.” Except lots of poor folks, facing a nasty letter from the IRS denying them the credit, just give up.
A related problem: because of Congressional pressure to control the error rate, more than 1/3rd of IRS individual audits are of returns claiming the EITC, which diverts resources from other tax gap priorities. (Like auditing the self employed, who have a notoriously low compliance rate. )
Currently, less than 1% of the EITC’s cost is spent on administrative expenses. In non-tax benefit programs, determining eligibility can eat up as much as 20% of spending. Fogg argues that both the government and private sector need to spend more on the front end to administer the EITC properly and to get a handle on ID theft, rather than requiring taxpayers, particularly poor ones, to deal with the mess on the back end. That would mean, for example, requiring employers to send W-2s to the IRS earlier and matching information documents before refunds are processed, which has not been a popular solution. It would also mean increasing the IRS budget, which the Republican Congress has slashed. And it would mean regulating tax preparers, which the courts have ruled the IRS needs permission from Congress to do—another nonstarter for the Republican Congress.
Sorry Warren. Given all that, a bigger EITC is simply not a practical solution now.
I have one other beef with Buffett. There’s a lot of room between the current $7.25 an hour federal minimum wage, which hasn’t been increased in six years, and the $15 an hour which he fears would destroy jobs. The purchasing power of the minimum wage has been on a general downward path since 1968, when it stood at $1.60—the equivalent of $10.88 in today’s dollars. To be fair, of course, Congress isn’t any more likely to sign off on an increase in the minimum wage than it is to spend the money to administer the EITC correctly. All the more reason for states to continue raising the minimum on their own.
Article originally posted in Forbes website.