Q & A: Addressing Questions and Concerns to Expanding and Extending Low-Income Tax CreditsQ: How can we afford these expansions in a time of deficits? A: Our current budget deficits are being driven a great deal by high unemployment. When people are unemployed, they pay less in taxes, less revenue is collected and deficits result. The EITC is designed to promote work. It incentivizes people to find work and work more. Therefore, when more people are working, our deficits will decrease. Also, the EITC helps the economy. EITC tax refunds are most often spent on necessities, such as utility bills, household items, school clothes or school tuition. These refund dollars go right back into the local economy creating a win-win for families and the community. For every dollar paid out in the EITC, there may be $1.50–2.00 in local economic activity (this called a “multiplier effect”). Unlike other tax provisions, the EITC is supported by both progressives and conservatives because of its anti-poverty, incentive-to-work structure. Q: How much do they cost? A: According to the Center on Budget and Policy Priorities, the EITC is an investment of $54.1 billion in 2010. Given that it raises 6.6 million people out of poverty each year, it has been called the most cost-effective poverty-reduction program in the United States. The expansion of the EITC for larger families and reducing the marriage penalty would each cost about $14 billion over 10 years. Expanding the CTC will be $83 billion over the next 10 years. To put that in perspective, full repeal of the estate tax would cost about $1 trillion over a decade and would only benefit the richest 0.3 percent of taxpayers. Q: How will this be paid for? A: As the 2001 Bush tax cuts expire at the end of 2010, Congress is deciding which tax cuts to continue and which to allow to expire. Allowing tax cuts for the wealthiest Americans to expire as planned is a way of generating the revenue needed to pay for this. Furthermore, closing corporate loop holes in the tax code and extending the estate tax are other ways to cover these extremely important tax credits while adhering to Congress’ “pay-go” rules. After investing trillions of dollars in Wall Street bailouts, wars in the Middle East, and tax cuts for the wealthy, Congress’ concern for cost is disingenuous at best. Also, leaders in Congress recognized the importance of including the expansion of the Child Tax Credit and reducing EITC’s marriage penalty by including in the “PayGo rules” governing their spending decisions, which means these expansions do not need to offset. Q: Why are we using the tax code to address poverty and low-income concerns? Why should one-third of American tax filers or approximately 46 million households pay no income tax? A: First, it’s important for us all to know that the households in question pay taxes. These tax credits only alleviate some or all of income tax for eligible families. But these families still pay property taxes, sales taxes, payroll taxes, and more. Historically the tax code has been used as a tool to effect policy that encourages everything from business development to home ownership to charitable giving. Every credit and deduction is viewed as costing us tax dollars and are called “tax expenditures” because of the foregone revenue. For example, the provisions that seek to ensure retirement income and financial security for millions of Americans are in the tax code. As a result, most American households that are already financially secure receive greater amounts of tax dollars than the low-income. The tax revenues foregone for the EITC and CTC help as many as half of all families with children move above the federal poverty level while encouraging the work ethic. These tools are part of the larger safety net that government structures to assist the most vulnerable in society — in the case of these credits, especially children — that fall by the wayside and into poverty as business reacts to market pressures to downsize, outsource, cut jobs, and lower wages. Moderates, progressives, and some faith-driven conservatives recognize that a function of government is to keep the social fabric of our civil society strong and to help the vulnerable. Ensuring that children are not raised in poverty — thereby supporting their potential to make life-long contributions to society — is a key pillar of a strong nation. Q: How can you justify making the credits refundable, i.e., giving the taxpayer the full credit even though it exceeds the federal tax owed? Isn’t this just welfare by another name? A: The EITC encourages and rewards work; if you don’t work, you don’t get the credit. Beginning with the first dollar, a worker’s EITC grows with each additional dollar of wages until it reaches the maximum value. This creates an incentive for people to leave welfare for work and for working poor people to work additional hours towards full-time employment. This incentive feature has made the EITC remarkably successful. Studies have shown, for example, that the EITC has encouraged large numbers of single parents to leave welfare for work. The Committee for Economic Development, an organization of 250 corporate executives and university presidents, concluded in 2000 that “The EITC has become a powerful force in dramatically raising the employment of low-income women in recent years.” In addition, while a worker receives the entire credit even if it exceeds his/her federal tax — the refundability feature — low-income families will be paying sales tax, property tax, excise tax, and other taxes. A refundable EITC helps offset these other taxes, thereby making the tax system as a whole more progressive and less inhibiting to work. Q: Doesn’t expanding these credits create an incentive for poor families to have more children? A: The EITC is the most successful program in this country for moving families with existing children out of poverty. Given all the factors that influence the number of children a family has, there is no evidence to support the claim that a modestly higher tax credit causes recipients to expand their family size and remain in poverty. For these credits, the cost of raising another child far outweighs the added income the EITC or CTC would provide. For example, a single mother with two children making $9,667 a year does not have an incentive to have another child as the additional $1,000 received is not enough to offset the costs of raising that third child. Q: What about the fraud and overpayment rates? A: Congress and the IRS have simplified complicated rules and increased oversight in order to reduce confusion and potential rates of fraud and overpayment. By comparison, noncompliance in other parts of the tax system results in a much higher loss of income for the IRS than any EITC overpayments. Sources have shown that EITC errors and noncompliance amount to less than 3 percent of all noncompliance, but analysts estimate that tracking down EITC errors would cost 45 percent of any new IRS enforcement dollars. Furthermore, the already small error rate also includes instances when families receive less credit than they are actually eligible for, rendering overpayment rates even smaller. Q: Don’t recipients of these credits just spend the refund right away — how does this really help lift them out of poverty over the long term? A: Long term, asset building through savings is a way out of poverty and to be encouraged. Research does show that people with incomes below the poverty line are able to save. The IRS promotes savings by offering split refund opportunities that enable tax filers to place a portion of the refund directly into savings. A tool like the Saver’s Bonus would provide low-income people with a government match on savings up to $500 a year. Individual Development Accounts (IDAs) are another such tool. Largely funded by the federal government’s Assets for Independence (AFI) program, they are matched savings accounts that help people with modest means save towards the purchase of a lifelong asset, such as a home, pursuing education, or for retirement. But because it is harder for poor people to save, especially in today’s economy, tax refunds due to low-income tax credits will frequently go quickly to pay for essential goods and services — but then stimulating the economy is a good thing too! Q: Don’t complicated tax credits force people to use paid tax preparers who rip them off? A: Yes, this can happen but paid preparers are not the only resource they can turn to. The IRS helps people complete their tax returns through its Volunteer Income Tax Assistance Program (VITA). VITA offers free tax help to low- to moderate-income (generally, $49,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Most locations also offer free electronic filing. Our RESULTS group has talked with our local VITA program and we’d love to connected you, or to locate the nearest VITA site, call (800) 829-1040. Q: Doesn’t the EITC give employers an incentive to keep wages low? A: Actually what keeps wages low is the negative U.S. trade balance that requires employers to compete with low-paying jobs overseas or outsource jobs. As jobs move overseas, we are left with more unemployed and low-income workers and the need for anti-poverty measures increases. In other words, as globalization levels the playing field, pockets of this country are being left empty and require help. For a large share of Americans, the U.S. labor market no longer works as a reliable way to build a stable career and support their families. Our low minimum wage that is not indexed to inflation and goes for long intervals without an increase also contributes to the problem. |