Two tax breaks for high income earners will be deep-sixed in order to expand – at a cost of $60 billion - the earned-income tax credit (EITC) to millions more people than currently receive the taxpayer-funded benefit.
Meanwhile, the U.S. Treasury Department’s inspector general says that the EITC now has one of the highest improper payment rates – some 21% to 25% of all payments in fiscal year 2012 – of any government program. In dollars, it’s between $11 billion and $13 billion annually.
Of the EITC expansion, Reuters news service reported,
“Obama would pay for the tax credit expansion by closing tax loopholes used typically by wealthy investors or employees of professional service companies such as law, consulting or lobbying firms.”
The disappearing tax breaks include the so-called “Gingrich Loophole,” tagged with former House Speaker Newt Gingrich’s name, which enables some high-income earners to avoid federal payroll taxes on earnings. Obama’s budget would also eliminate the carried-interest rule. The rap on this tax break is that some hedge fund and private equity managers and real estate developers pay lower taxes on large portions of their incomes.
The president’s proposals are likely to be locked up in the lowest part of an election-year dungeon, as Republicans who control the House are wouldn’t seem willing to support these proposals. Senate Democrats in tight election contests might not want to be accused of expanding an “entitlement” program with an astronomically high payment error rate. The administration says the proposals would give more than 13 million Americans a tax cut by targeting the wealthy (as explained above). But some of the people benefiting now from the EITC see any taxes they owe eliminated by the program – and receive additional taxpayer-funded money.
Among the proposal’s benefits, according to the administration:
In the past the EITC has been generally supported by lawmakers because it’s seen to incentivize low-income workers to stay in the workforce rather than giving up their jobs and potentially receiving even higher levels of taxpayer-funded financial assistance. One of the EITC’s chief problems – apart from election-year politics – is that administration of the EITC is more or less a disaster. The only reason the EITC can still function with an improper payment rate of up to 25% is because it is government (read taxpayer) funded.
The Treasury Inspector General for Tax Administration (TIGTA) said of the EITC problem in October 2013:
“The Internal Revenue Service (IRS) has made no significant improvement in reducing improper Earned Income Tax Credit (EITC) payments, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).”
It gets worse. The estimated dollar value, $11 to $13 billion, of the error rate may be understated, according to TIGTA:
“TIGTA found that the IRS’s Fiscal Year 2012 estimate for EITC claims and improper payments are understated because the laws extending increases in the EITC were not factored into the estimates.”
Since 2003, estimates are that the error, or overpayment, total exceeds $130 billion.
While it might seem to make sense to fix the payment error problem and not change the tax rules for some Americans cited as wealthy before trying to expand a program to include millions of more beneficiaries, that’s apparently not in the cards. What is in play is that the EITC will be brought into the mid-presidential term elections in 2014.