The U.S. House of Representatives passed a tax reform bill last Thursday called the Tax Cuts and Jobs Act. The legislation would provide a tax cut for many and simplify the tax code by slashing the tax brackets from seven to four and eliminating many exemptions and special breaks. Deeply rooted in Republican orthodoxy, it is exactly the sort of bill you would expect from the GOP of 2017.
While it does simplify and lower marginal rates, both corporate and personal, the bill doubles the current standard deduction of $6,350 (resulting in an average 15 percent increase when eliminated exemptions are taken into account), does not reform the Earned Income Tax Credit (EITC), and expands the Child Tax Credit (CTC) from up to $1,000 per child to $1,600, and adds a new “Family Flexibility Credit.”
Proponents of the bill would say the EITC shouldn’t be touched and that the Child Tax Credit needs to be increased to ensure Americans aren’t paying more in taxes under the plan. That might be true—for people who actually pay income tax.
Half of Wage Earners Pay No Federal Income Tax
About 44 percent of Americans who file pay no net income tax, either having no taxable income or tax liability and often getting more in refunds than they paid in. Despite Republican clichés about “personal responsibility,” “keeping more of what you earn,” and “fighting the entitlement mentality,” the GOP tax bill does nothing to address this massive redistribution scheme. In fact, the Washington Post reports the number of people getting “negative income tax” is estimated to increase to 47.5 percent, adding 6 million additional tax filers to the ranks of “getters.”
The bottom 40 percent of earners pay -3.9 percent of the income tax collected. Yes, that’s a negative number. The bottom 20 percent pays -5 percent income tax and the second lowest quintile pays -2.9 percent. If you add in the payroll tax and other taxes, these filers pay a net positive of 3.6 percent and 7.8 percent, but payroll taxes are for federal benefits they expect to draw from in the future.
Most people (not this generation of workers as a whole, but most people) will end up taking more from Social Security and Medicare than they pay in. Even if you left that fact aside, the Tax Policy Center has estimated about one-third of workers with no income tax liability currently get enough in refundable tax credits to cover their payroll taxes. Any way you cut it, 40 percent of the country is paying peanuts in taxes or actually getting money from other taxpayers.
Tax credit dogma is firmly established in DC, and it’s not like the programs aren’t popular. The EITC has been expanded numerous times with bipartisan support since its enactment more than 40 years ago. It was originally meant to temporarily offset the payroll tax for low-wage workers, but like all popular welfare programs, it became a permanent fixture in the tax code. It went from a maximum $400 value, up to 10 percent of a worker’s wages in 1975, to being 88 percent refundable today and valuing up to 45 percent of a worker’s income.
It Encourages Work But Only Up to a Bare Minimum
Democrats and Republicans traditionally view the EITC as an “anti-poverty tool,” because you can only claim it if you work. This is only true, however, up until a worker reaches the top of the bell curve in earned income for the peak return of $6,269. Earnings beyond that point yield diminishing returns.
The Center on Budget and Policy Priorities claims that the EITC pulled roughly 6.5 million people out of poverty in 2015. That’s typical rhetoric used to justify entitlement spending, when all it really means is that income from taxpayers puts total income for an earner or family over the government-established poverty threshold. It’s more accurate to say that, just like other entitlement programs, it is merely sustaining people in their poverty—but you won’t hear that from Republicans.
While the results of refundable credits in terms of encouraging work are mixed at best, let’s be real: refundable tax credits are Republican-style welfare. In 2011, the Internal Revenue Service sent refunds totaling $99.1 billion via the EITC, CTC, and AOTC (American Opportunity Tax Credit).
That’s down from $120 billion in 2009, according to the Tax Foundation, more whan was spent on Veterans Affairs or the Department of Education the same year. In 2015, total claims for the EITC were estimated at $62.3 billion, just less than $26.0 billion for the ACTC, and $10.2 billion for the AOTC. At a total of $98.5 billion, it’s just a minor improvement from 2011.
Note the High Rates of Fraud
These refundable credits are just entitlement programs by another name. Like other entitlement programs, they have a high rate of fraud. In 2015 the IRS “improperly paid” $15.6 billion through the EITC, and $5.7 billion through the CTC. The CTC’s rate of fraud is estimated at 24.2 percent. That’s an improvement from two years prior, when the Office of the Inspector General pegged the improper payment rate at somewhere between 25.2 percent and 30.5 percent, totaling between $5.9 and $7.1 billion.
In the true style of an incompetent welfare state, Congress heretofore has not required people claiming the refundable portion of their Child Tax Credit to provide a Social Security number. Thankfully, the tax reform bill would change that.
House Republicans say President Trump will pivot to cutting welfare spending after they accomplish tax reform. That’s an important step in getting the federal government on stable financial footing, but just think about it for a minute. Nearly $100 billion are paid out via the income tax system. And the GOP says after tax reform they’ll turn to cutting entitlements. Sure.
NPR reported that House Speaker Paul Ryan promised the House bill would mean “faster economic growth” and “bigger paychecks” for American workers. Neither Ryan nor the other leaders in Congress will mention that some of those paychecks are coming straight from taxpayers.
This Is People Keeping More of What Others Earn
Now, it’s arguable that 44 percent of income tax filers are too economically challenged to be asked to pay taxes, and that the more money the government has, the more power policymakers have to screw things up. That would be a fair argument if government weren’t raking in cash from the other 55 percent and forking it over to those individuals via spending programs, including refundable tax credits, like it’s currently doing. Is it just assumed that shelling out $98 billion is so absolutely necessary to supplement the income of 44 percent of tax filers that scaling it back shouldn’t even be on the table?
Republicans say they want us to keep more of what we earn. You can brush that off as pandering, and by the actions of Congress, at least some of them don’t even believe it. Nevertheless, it is the morally correct position. It’s fair that people keep their own money because they earned it.
Some point out this is because individuals will spend their money better than government can, but the real reason the tax credit scheme should be opposed is that redistribution is theft. The government reaches into your pocket and gives your cash to your neighbor. Progressives complain of a stigma about low-income people receiving checks from the government. Well, there should be. It’s stolen money. And I know it’s politically incorrect to ask, but is a whole 44 percent of the country really poor enough to need a handout?
The top 1 percent pay a tax rate seven times higher than the bottom 50 percent pay, and 10 percentage points greater share of the income taxes than the bottom 90 percent pays, and the Left complains that tax reform is “a tax break for the rich.” Yes, it would let the rich keep a whopping average of 2.6 percent more of their own income, and I’m not ashamed to say that’s the best part of this bill. They deserve to be robbed a little less, don’t you think?
Redistribution Takes Power Away from the People
If you aren’t sold on the immorality of wealth redistribution, consider that the ability to redistribute increases government power over our lives. Politicians pull various levers to encourage or discourage behavior, from buying houses to having more children, by filtering our own money back to us at differing rates and even handing us other people’s money. The more money the government collects, at any level, the more power it has to interfere in your life.
Redistribution also sows the seeds of “class warfare” and an entitlement mentality as citizens become accustomed to, then begin to demand, money from their neighbors. We’ve begun to reap the harvest of normalized redistribution in rioting movements like Occupy Wall Street and Antifa, and widespread support for socially and economically destructive socialist programs.
Tax credits are a major means of redistribution and should be addressed as such. They require a simple and fair fix: make them all nonrefundable. It wouldn’t quell the class warfare, but it could take some of the tax burden off the 55 percent who do pay taxes.
I’ll look for that reform when hell freezes over, but it would at least be nice if GOP leadership owned up to the fact that they’re promoting and even expanding a system that lets slightly more than half of taxpayers carry the rest of the country.