Q & A: Addressing Questions and Concerns about Low-Income Tax Credits
As always, volunteers will face some congressional offices that are skeptical about low-income tax credits and/or savings policies. Below are a few objections you might hear and sample responses to those arguments.
Q. Recent statistics show that half the country pays no income tax. Why should we work to help low-income people get more tax refunds when they don’t even pay taxes?
A. I’ve heard this statistic, though it’s an exaggeration at best. It is true that some households do not pay federal income tax – largely those that don’t have enough income. However, they still pay federal payroll taxes, gas taxes, sales taxes, property taxes and other state and local taxes, just like everyone else (at least 28.3% of those who don’t pay income tax pay payroll tax). In fact, studies show that low-income families pay more in state and local taxes as a share of their income than wealthy taxpayers.
Second, this percentage is unusually high because of the recession, where millions of people lost jobs and their incomes dropped. A more typical figure is between 35 and 40 percent. If anything, this increase says we need to do a better job creating and sustaining good-paying jobs.
Finally, it’s important to remember that EITC works at lifting families out of poverty and overall, EITC recipients pay much more in federal income taxes over their career than they ever receive in EITC benefits.
Q: The EITC and CTC are just “welfare” by another name. Doesn’t this just create a cycle of dependency?
A: No. These tax credits help families to support themselves. Unlike welfare, families and individuals must be employed to receive these benefits. Unfortunately, a minimum-wage job in America is not enough for a family to live on. In fact, a family of four with at least one full-time minimum-wage worker cannot move above the poverty line without the EITC and SNAP (food stamps).
Second, studies show that the EITC actually reduces dependency on welfare, in large part by boosting the employment of single mothers, and helps people move up the economic ladder. In 2015, 6.5 million people rose above the poverty line because of the EITC according to the Center on Budget and Policy Priorities (CBPP). More than half of the tax filers who received the EITC between 1989 and 2006 received the credit for no more than a year or two at a time and generally paid substantial amounts of federal income tax in other years. 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." For more on EITC encouraging work, visit this report from the CBPP.
Additionally, 42 percent of EITC recipients use the credit for 1 year or less consecutively, and most recipients get the credit for two years or less.
Q: Times are tight. Can we afford this policy right now?
A: We can afford it; we just choose not to. We cannot afford costly tax cuts for wealthy corporations. Yet, that is exactly what the current administration is proposing to do, both through the American Health Care Act and President Trump’s tax reform plan. Child poverty alone costs the U.S. more than $670 billion dollars, almost 4% of the U.S. gross domestic product (GDP).
The Joint Committee on Taxation estimates that the EITC will cost over $74 billion in 2018. To put that in perspective, President Trump’s tax reform plan gives tax breaks to the wealthy that are estimated to cost about 76 times that much at over $5 trillion dollars in the next decade.
Furthermore, the EITC and CTC are important for our economy. Taxpayers who receive these credits put their refunds right back into the local economy creating a win-win for families and the community. The EITC creates between $1.50–2.00 in economic activity for every dollar spent (this is called a “multiplier effect”). In contrast, every federal dollar spent keeping taxes low on capital gains and dividend taxes generates only $0.39 (tax cuts overwhelmingly benefiting upper-income households). The EITC succeeds at helping families get back on their feet such that EITC recipients pay more in federal income taxes over time than they receive in EITC benefits.
Also, we spend about $400 billion on tax provisions that help Americans build assets. Yet less than 3 percent of the benefits go to the bottom 40 percent of earners. If we can afford to reward wealth at the top, we can also afford to create wealth at the bottom.
Q: How much do these credits cost?
A: The Joint Committee on Taxation estimates that the EITC will cost over $74 billion in 2018. Given that it raises 6.5 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 cost about $25 billion over 10 years, and expanding the CTC will be $72 billion over the next 10 years.
The EITC helps hard-working families stay out of poverty and make ends meet. The CTC helps parents raise their children. We know that credits like these make children healthier, help them do better in school, make them more likely to go to college, and work more and earn more as adults. Because most people only claim the EITC for a year or two at a time, it’s a short-term investment with great long term benefits. These credits are well worth the cost.
As Congress considers the tax reform policy changes, we need to strengthen our economy and our future. I think we need to invest wisely in providing opportunities for families to work hard and move out of poverty.
Q: Doesn’t expanding these credits encourage poor families to have more children?
A: 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. Plus, if a family has four or more children, their EITC remains the same as if they had only three children.
Q: What about the fraud and overpayment rates?
A: The EITC does have a high estimated error rate (about 25 percent), but that is much different than a fraud rate. Fraud indicates mal-intent, where an error rate can include simple errors, both accidental overpayments and underpayments. The EITC is a complicated program with very detailed regulations. Paid tax preparers, the IRS, or individuals can make these errors.
Additionally, there is evidence that the overpayments are probably way overestimated for several reasons. First, the National Taxpayer Advocate reports that 40 percent of claims that were identified as incorrect were successfully appealed. Second, this number doesn't include underpayments. Lastly, the percentage is based on 2008 data; the IRS has taken steps to improvement the error rate since 2009.
The evidence also strongly suggests that much of the problem rests with paid tax preparers and not taxpayers themselves. According to the IRS, 68 percent of EITC filers use paid third parties to prepare their taxes, which means we need to invest in volunteer tax preparation (VITA) programs and better regulate paid preparers when free tax filing is not an option for low-income Americans.
The bipartisan December 2015 tax deal took some steps to address the error rate in the EITC. It includes stronger anti-error initiatives to decrease the error rate, including penalties for improperly claimed credits – such as increased penalties for paid preparers engaging in reckless conduct and restrictions on taxpayers who claimed improperly the year before. It also imposes even stricter ITIN and SSN requirements for workers to be eligible to claim the tax credits, which immigration advocates fear will reduce access for immigrants and refugees.
Finally, the IRS has limited enforcement tools to ensure that errors do not occur. When the IRS tried to regulate paid preparers, a federal court ruled that the IRS did not have this authority. Congress has also substantially reduced the IRS' resources over the years. Congress has the power to grant the IRS the authority to regulate paid preparers and to provide the IRS with better tools.
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 Financial Security Credit 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 – including rent, transportation, and other key expenses that help them make ends meet. And 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, $52,000 and below) people. 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 to learn more!
Q: I’ve heard that undocumented immigrants are taking advantage of the Child Tax Credit?
A: To start, it is important to understand how much immigrants contribute to our economy and specifically our federal government. It is not fair to assume that undocumented immigrants do not contribute to our tax system. The Congressional Budget Office estimates that over 50 percent of unauthorized immigrant workers pay income taxes and payroll taxes.
Unlike the EITC, families can claim the Child Tax Credit with an Individual Taxpayer Identification Number (ITIN), which undocumented immigrants can receive – many of whom are raising children who are American citizens. The CTC is designed to help families raising children in the United States with the cost of doing so – and it makes sense that we help all children growing up in our country. Nearly one out of every 15 U.S.-born children living in the United States has at least one unauthorized parent. Several proposals have been introduced in both the House and the Senate to try to prohibit eligibility for the Child Tax Credit for immigrant families by requiring a Social Security Number to claim the credit.
Q: We need to simplify the tax code. Doesn’t this just make it more complicated?
A: It is true that our tax code is complicated, but policies like the EITC ensure that our tax system helps struggling families make ends meet, instead of giving tax breaks to millionaires and billionaires. We need to be protecting and expanding programs like these that have proven to be effective in lifting families out of poverty and creating economic growth.
At the same time, the tax code is riddled with other provisions that overwhelmingly benefit upper-income earners, those who need them the least. Instead of targeting these credits for low-income working families, families who already pay more than their fair share in payroll, sales, and state and local taxes, we should be asking wealthy Americans to pay their fair share. Tax reform should be based on principles of fairness and on protecting those earning the least.
It is also important, though, to protect tax files from predatory practices such as the Refund Anticipation Loan or fraudulent paid preparers, who take advantage of the complicated nature of the tax code. Changes have been made in recent years to tighten oversight. In addition, 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, $52,000 and below) people. 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.
Q: The government shouldn’t be paying people to work.
A:That’s exactly right. In an ideal world (or even just a fairer one), people would be able to find work that pays a living wage. Unfortunately, that is not reality. Millions of Americans are working hard every day to make ends meet but their jobs don’t pay enough to do it. Until all employers pay a living wage, we need the EITC and CTC so that all Americans can work hard, play by the rules, and make an honest living.