The Handouts in the Tax Code that Nobody Wants to Discuss
The forgotten "30% club" that makes money off the tax system
For years, Democrats (and Republicans) have surreptitiously created dependency by manipulating the tax code. Liberals often refer to handouts as tax cuts, and tax cuts as handouts to the rich. To that end, they have perpetuated a travesty in which millions of people are able to obtain welfare payouts without ever applying for them. Most people don’t even realize that they are receiving handouts because they view them as “tax credits.” Accordingly, all efforts to eliminate these handouts are viewed as insidious tax increases.
These handouts are better known as refundable tax credits.
While most (conservative) commentators focus on the fact that 51% of tax filers paid no income taxes in 2009, the more egregious fact is that 30% of filers had a negative income tax liability. Over 95% of these handouts came from the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). As part of the Stimulus, Obama created a third refundable credit; the Making Work Pay Tax Credit.
Here are the relevant statistics for those refundable tax credits in 2009 (CRS report):
Earned Income Tax Credit
The EITC is granted primarily to low-income households with children, who make under $42,000. In 2009, the maximum value of the credit was $457 for a childless taxpayer, $3,043 for a taxpayer with one child, $5,028 for a taxpayer with two children, and $5,657 for a taxpayer with three or more children.
What was the cost for those credits?
Number of Tax Returns with Credit Claimed: 25.70 million
Number of Tax Returns with Refundable Portion Claimed: 24.92 million
Total Budgetary Cost: $54.98 billion
Budgetary Cost of Refundable Portion: $53.99 billion
Hence, almost the entire cost of the EITC is paid out in the form of a handout.
Child Tax Credit
The Child Tax Credit reduces a filer’s tax liability by $1,000 per dependent child. It begins to phase out for single filers making $75,000 and joint filers making $110,000. The standard Child Tax Credit is non-refundable; however, low-income families benefit from the Additional Child Tax Credit (ACTC), which is refundable. Approximately 21 million of the 35.6 million who receive child tax credits enjoy negative tax liabilities through the ACTC. The total budgetary cost of the CTC is $54.33 billion, while the cost of the refundable portion was $27.50 billion.
Making Work Pay Credit
This credit was part of the Stimulus bill, and only applied for 2009 and 2010. The MWP credit reduced the tax withholdings from each paycheck up to $400 annually for single filers and $800 for joint filers. It was phased out for those making over $75,000. Approximately 32 million of the 101 million who received this credit enjoyed negative tax liabilities through the MWP. The total budgetary cost of the MWP in 2009 was $50.79 billion, while the cost of the refundable portion was $12.82 billion. For 2010, that number is estimated at $19.7 billion.
Let’s put these numbers in perspective. Excluding the MWP tax credit, which was a two-year anomaly, the EITC and ACTC (the refundable portion) costs the Treasury $81.49 billion. For some comparison and budget context: the entire cost of the Food Stamp program is $77 billion, while the cost of SSI is about $53 billion.
Why should anyone enjoy a positive tax liability, aka a tax handout, when we already have 77 welfare programs? With the exception of Medicaid, we are paying more for refundable tax credits than any individual welfare program. Yet, many of these people have never asked for a handout! They are useful tools in precluding dependency on welfare and incentivizing people to work, if we were to eliminate many welfare programs. However, we shouldn’t have both.
The system has been stacked so that millions of people would automatically receive handouts under the guise of the tax credit system.
As the Super Committee begins to tackle tax reform, we will witness much disquiet over the exemptions and deductions for the rich and big corporations. We must remember that they already incur a tremendous positive tax liability. The real issue is that a large share of the estimated $1 trillion in exemptions, deductions, and credits (known as “tax expenditures”) allow too many people to have zero income tax liability, or, more egregiously, a negative liability.
Many of the non-refundable tax credits, such as the reduced tax rate on dividends and capital gains, the tax preferences for defined benefit plans, and the tax preferences for defined contribution plans, should be maintained – even if they result in near-zero tax liability for some. They promote savings and efficiency. But, at the very least, we must tell the truth about the EITC and ACTC. They are not tax credits; they are welfare payments – and must be eliminated. Changing the status of a tax unit from negative tax liability to zero liability is not a tax increase. At the current trajectory, the cost of these handouts over the next ten years will account for most, if not all, of the $1.2 trillion in targeted budget savings from the Super Committee.
Oh, but you might ask, what would you do for low-income families? Well, we can’t offer more tax cuts to those who don’t pay taxes and are already eligible for a litany of welfare programs. We can’t outbid the socialists in offering more handouts. But we could make this promise: by fostering a true free market society – one that is devoid of over-taxation, regulation, litigation, and yes – subsidization – they would have a realistic opportunity to receive a decent paycheck, instead of a handout.
Such a bold move would give the Wall Street protesters – the product of the 30% crowd – something more substantial to protest.