Stacey Vanek Smith of American Public Media reminded us: “Happy Earned Income Tax Credit Day! You didn't forget the IRS' special day, did you? It celebrates the federal income tax credit available to low income families.” “Marketplace Morning Report for Friday, January 27, 2012.”
EITC, the Earned Income Tax Credit, sometimes called EIC, is a tax credit to help workers keep more of what they have earned. The refundable federal income tax credit is for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund.
A Cleveland Plain Dealer blogger tells readers, “If 2011 was a tough year for you financially, the Internal Revenue Service may have good news. The earned income tax credit is a government benefit that could result in you getting a tax refund of up to $5,751, provided that you worked during 2011 and your household income was below $49,078. Even if you paid little or no taxes to the IRS, you still may qualify for an EITC refund.”
Yes, it is true -- The IRS not only collects taxes, but it also distributes benefits. “The IRS officially reminds us: “An expanded Earned Income Tax Credit (EITC) means larger families will qualify for a larger credit, offering greater relief for people who struggled through difficult financial times last year.”
The IRS and the Treasury Department marked EITC Awareness Day as their partners nationwide worked to highlight the availability of this important tax credit. EITC is one of the federal government’s largest benefit programs for working families and individuals. Last year, according to the IRS, nearly 24 million people received $50 Billion in benefits. The average credit was more than $2,000.
The EITC has its problems -- claiming the credit is too complex. A low income taxpayer may be asked to both determine and document income, investment income, and his or her relationship to and the residency of himself or herself and one or more children. This is a complication recently pointed out by the National Tax Advocate. Preparers claiming the EITC for clients are also subject to increased scrutiny by the IRS. The AICPA magazine, Tax Advisor, recently published an article on the due diligence requirements associated with claiming the credit. The Treasury Inspector General for Tax Administration offers evidence that the EITC error rate is as high as 28%. This translates to over $13 billion erroneously paid out each year.
Many non-payers receive generous cash payments through "refundable" tax programs such as EITC or the child tax credit which off-set the other taxes they may pay. The earned income credit is intended, in part, to make up for the regressive nature of payroll taxes that disproportionately impact the poor. According to the Tax Foundation, the IRS paid out more than $72 billion in these refundable tax credits in 2008, double the amount of refundable tax credits in 1996. These credits are so generous, that the Joint Committee on taxation estimates that in 2009, they exceeded the employee share of payroll taxes for 23 million tax filers and exceeded the employer's share of payroll taxes for 15.5 million filers.
More Americans are outside of the income tax system than these figures would indicate. There are millions of people who earn some income but are below the threshold for filing a tax return. When these people are added to the non-payers, the Tax Policy Center at Brookings estimates that 47 percent of all households pay no income taxes. We are getting dangerously close to the "tipping point" in which there are more non-payers than payers.
On a practical level, we need to ask whether the proper function of the IRS is to deliver income subsidies. Do we want millions of Americans to see April 15th as "payday" rather than "tax day?" Don Alexander, who was an IRS Commissioner during the Nixon and Ford Administrations, argued passionately that the IRS’s job is to collect tax revenues, and not administer social programs. Most recently, recognizing what has been delegated to the IRS by Congress, the National Tax Advocate suggested that the IRS mission statement be revised to explicitly acknowledge the agency’s dual role as part tax collector and part benefits administrator. Such a revision would require the IRS to develop a strategic plan that gives sufficient attention to both roles and would underscore that the IRS requires sufficient funding to perform both functions effectively.
Criticism of the federal tax system has heated up recently with the release of Mitt Romney’s taxes and what is perceived as a tax code that favors the wealthy. President Obama’s State of the Union address highlighted inequities in the system, lamented the Bush tax cuts and suggested a “Buffett Rule,” which translates to a minimum 30% rate for millionaires. Who actually bears the tax burden and who should bear it? More fundamentally, do we agree on the goal of the federal tax system? Elizabeth MacDonald of Fox Business offered scathing criticism of President Obama’s tax posture: “The federal tax burden in this country disproportionately falls on the upper bracket, including small businesses who create most of the jobs, which pay wages to taxpayers who pay federal income taxes the government overspends.” The White House is questioning a Fox report that the top 10% of U.S. households with the highest incomes pay 70% of federal taxes. On a political level, we can’t even agree on who is burdened by tax in America! Lacking that fundamental agreement means it is premature even trying to repair or rehabilitate a “broken system.”
by William Leary, Director
MFR, PC
wleary@mfrpc.com | 
