Tag: welfare

Removing EITC and Child Tax Credits for DACA/DAPA recipients and Non-Citizens

President Obama’s executive actions on immigration, known as the Deferred Action for Parents of Americans and Lawful Permanent Residents (DAPA) and the Deferred Action for Childhood Arrivals (DACA), have allowed those beneficiaries to retroactively receive Earned Income Tax Credits (EITC) and Child Tax Credits (CTC).

The DACA and DAPA programs grant recipients temporary work permits during the period of their deferred action.  Under current legislation, CTC eligibility is determined through either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).  Since many unauthorized immigrants are already issued ITINs, eligibility for the CTC is not much affected by DACA and DAPA.

EITC eligibility status is another story altogether, as currently only those who file taxes with a valid SSN are eligible to receive the benefits.  DACA and DAPA will allow those recipients to apply for an SSN, thereby making them eligible for EITC benefits.  Another IRS rule allows those recipients to retroactively claim EITC benefits for previous years in which they were not in the country legally.  Under current law, taxes can be filed retroactively for up to three years by using the 1040X Amended Tax Return Form.  Because DACA and DAPA recipients are eligible for SSNs, they are able to file amended tax returns, making many eligible for EITC benefits in previous years.

The EITC is known as a refundable tax credit, meaning that low-income families can receive a tax “refund” that is larger than their original tax liability.  The program has become notorious for fraudulent and improper payments, yet the IRS has not enacted systematic reforms.  According to a report by the Treasury Inspector General, the IRS paid out $63 billion in EITC payments in 2013 alone – $15 billion of which were given to people ineligible to receive EITC benefits.  Of that $63 billion, only $8 billion were actual tax cuts and $55 billion were payments.

Non-citizens should be ineligible for means tested welfare benefits, the EITC, and CTC.  Walling off welfare benefits is the best option after scaling the benefits back or removing them for everybody.  Here is our previous work on how to build a wall around the welfare state.  Since I did not consider the EITC in my original Cato policy analysis on how to wall off welfare benefits to non-citizens, these are the specific laws that would need to be amended to correct this.

Reforming Section 32(c)(1)(E) of the Internal Revenue Code of 1986 delineates the eligibility for EITC benefits. The language in subsection (1) determines eligibility.  Changing the statute there could eliminate the ability for newly legalized immigrant workers to retroactively file for EITC benefits.  This section could also be amended to deny the EITC to non-citizens broadly, but that is more complex as SSNs are granted to some non-citizens.  A citizenship requirement for EITC would still decrease the outlays. 

CTC should also be denied to those who had their deportations deferred. CTC eligibility requirements are included in Section 24 of the Internal Revenue Code of 1986.  Denying CTC benefits for previous years when the tax filer was ineligible for such benefits was actually proposed in Congress last year – here is the text of that bill.  If possible, CTC benefits should be reserved for citizens only (if we can’t get rid of them altogether).

Immigration is a huge economic net-positive for the United States and fiscally neutral in the long run.  Poor immigrants generally underuse means-tested welfare compared to poor Americans.  Immigrants broadly subsidize the entitlement programs.  Regardless, tax credits should not be retroactively available to immigrants who have had their deportations deferred nor should non-citizens have access at all.

Fiscal conservatives can use immigration as an argument in favor of restricting welfare and EITC benefits.  That would be a far more effective and conservative use of their time than using the welfare state as an argument against liberalized immigration.       

Obamacare’s Exchange Subsidies Are So Essential, People Are Turning Them Down

According to U.S. News & World Report

[B]rokers say they do hear from clients who are eligible for subsidies – which are based on household income and not assets – but want no part of them. Health officials have been boasting that 6.6 million people have enrolled in health coverage through state or federal marketplaces created under the Affordable Care Act, but in sharp contrast stands a small group of Americans who say they want nothing to do with the plans, even if they would save money. Their reasons vary: Some are protesting Obamacare, while others simply feel it’s unethical to accept taxpayer dollars to pay for health insurance…

For [Kansas City resident Grace] Brewer, buying a plan on her own would mean she would not have enough to pay for housing, she says, so she chose not to be insured this year and will have to pay a penalty in her 2016 tax filing that is likely to be 2 percent of her income. She has no dependents, is healthy, does not use prescriptions and says she has been careful about her health choices, not overusing medical care.

“I am frustrated. I am angry. And I say ‘no’ to the exchanges,” she says.

Some people are turning down the subsidies because they don’t need them:

Complicating the ethical question is that some people who qualify for subsidies based on their income could afford to pay their own way. “There is no question that we are enrolling people through these programs who would otherwise be considered middle-class or even affluent,” says Ed Haislmaier, a senior research fellow for health policy studies at the right-leaning Heritage Foundation think tank. “We are seeing people with enrollment in these programs that have significant assets, but for whatever reason – usually a temporary reason – fall below the income line.” 

Those reasons could range from early retirement to a midcareer job change. But whatever the case, some of those who are turning down subsidies are aware others are gaming the system, and they think it’s wrong.

“I won’t be a part of it,” Brewer says. “I don’t think it’s right. I don’t think it’s ethical, but the system has gotten so complicated that people can take advantage of those things.”…

The fact that the subsidies are causing controversy among the very people they’re intended to help is “evidence that the government doesn’t do charity very well,” says Michael Cannon, director of health policy studies at the libertarian Cato Institute think tank. 

“Prior to Obamacare, the federal government was subsidizing all sorts of people who did not need health insurance subsidies,” he adds, referring to services like the Children’s Health Insurance Program, Medicaid and Medicare, the government’s health program for seniors. “With Obamacare, we are subsidizing even more people who don’t need assistance.”

Something to keep in mind when contemplating the impact of King v. Burwell.

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

The Republican Food Stamp Plan is a Modest Step in the Right Direction

Republicans are expected to vote this week, possibly as early as today, on a proposal to cut the food stamp program by $39 billion over the next 10 years, while reforming the program to tighten eligibility and emphasize the importance of work. From the outcry among congressional Democrats and much of the media, you could be forgiven if you anticipated the outbreak of the Great Famine of 2013. In reality, the hysteria is just plain silly given how modest the Republican plan really is.

Note that as recently as 2000, just 17 million Americans participated in The Supplemental Nutrition Assistance Program (SNAP), the food assistance program formerly known as food stamps, at a cost of less than $18 billion. Today, roughly 48 million Americans receive SNAP benefits, costing taxpayers more than $82 billion per year. Yet according to the Department of Agriculture, nearly 18 million American households remain “food insecure.”

In the face of serious questions about whether the growth of SNAP has been justified and whether it successfully addresses hunger in America, Republicans are discussing cuts that simply trim around the edges of the program.

For example:

Aggregate Spending will still remain at elevated levels even with these cuts. Even with the additional cuts (totaling $39 billion), average outlays from 2013-2023 will be almost $73.5 billion, which is more than $5 billion more than outlays were in 2010 (they were $68.3 billion). In 2023, long after CBO projects the effects of the recession to have subsided, with unemployment declining to about five percent, outlays will still be $69.6 billion, higher than any year before 2011, and more than $1 billion higher than 2010.

Almost all of the savings come from returning to traditional SNAP rules or ending loopholes. For example, the Republican proposal would restrict so-called ‘categorical eligibility,’ restoring traditional categorical eligibility, which requires receipt of cash assistance for food stamp eligibility. Currently, there are several ways that low-income families can become eligible for SNAP. For instance, households can qualify for SNAP benefits if they meet the program’s income and asset test: a gross income below 130 percent of the poverty level and a net income below 100 percent of poverty, as well as less than $2,000 in assets (although there are some exemptions, such as the value of houses, a car, and retirement accounts). However, more often participants become eligible for SNAP because they are also eligible for other government welfare programs. Nearly two-thirds of households receiving SNAP qualify through this broader categorical eligibility and were not subject to asset tests or certain income tests. This has allowed eligibility to creep much farther up the income scale, allowing many non-poor Americans to receive benefits. The Republican proposal would dramatically scale back categorical eligibility, requiring more recipients to meet income and asset requirements. As a result, the program would be refocused on those most in need.

The Republican plan would also eliminate the so-called LIHEAP loophole, which allows states to increase benefits for individuals who also receive utilities assistance under the LIHEAP program. Approximately 16 states have used this loophole to leverage nominal (as little as $1) LIHEAP payments into an increase in households’ SNAP benefits. Republicans would require states to provide LIHEAP benefits of at least $20 in order to qualify for the exemption, preventing them from manipulating the system to increase federal payments.

The bill puts a greater emphasis on moving recipients from welfare to work. The Republican proposal simply ends waivers from SNAP’s traditional work requirements that were granted to states starting in 2010. Prior to 2009, able-bodied adult recipients between the ages of 18 and 50, without children, were required to work, participate in an employment and training program, or participate in a SNAP “workfare” program for at least 20 hours per week. Otherwise, they could collect SNAP benefits for only three months in a given 36 month period. That requirement was waived nationwide in 2009, and on a state-by-state basis after 2010. Currently, 44 states have such waivers, although some states have announced that they will voluntarily relinquish their waivers next year. (Oklahoma, Kansas, Wisconsin and most counties in Ohio). As a result of these waivers, in 2011, the most recent year for which data is available, only 27.7 percent of nonelderly adult participants were employed, while another 28 percent reported that they were in the process of looking for work. That means that fully 44 percent were neither employed nor actively searching for work. Looking specifically at working age, childless, able bodied adults, almost three quarters or 2.8 million SNAP households, had no earned income.

Yet we know that work is the key to getting out of poverty. Just 2.8 percent of those working full-time today are below the poverty line, compared to 24 percent of those not working. Far from being cruel, by restoring work to a primary component of the welfare system, Republicans would be nudging recipients onto a path out of poverty.

Moreover, it is worth noting that the Republican proposal actually increases funding for pilot projects designed to increase work effort and reduce dependency.

The food stamp program is long overdue for reform. The Republican plan is a very modest start.

The Work vs. Welfare Trade-Off: A Response to Critics

Last week, the Cato Institute released a new study, The Work vs. Welfare Trade-Off, 2013: An Analysis of the Total Level of Welfare Benefits by State. It showed that a family collecting welfare benefits from seven common programs – Temporary assistance for Needy Families (TANF), food stamps, Medicaid, WIC, public housing assistance, utilities assistance (LIHEAP) and free commodities – could receive more than what a minimum wage job would pay in 35 states, more than a $15 per hour job in 13 states, and more than a $20 per hour job in the eight most generous states. We concluded that the high value of welfare benefits might create a disincentive for recipients to leave welfare for work.

Unsurprisingly, our study has attracted criticism from several quarters. Some of those critics make valuable points that might improve future research, but most criticism falls far short of the mark.

Among the most frequent criticisms:

SNAP should be the basis of the package instead of TANF

Some of our critics have essentially attempted to redefine “welfare” to mean a program other than TANF. Our analysis started with a family on TANF and then looked at what additional programs the family would receive. By starting with a much larger program, such as food stamps (SNAP), our critics are able to – correctly – argue that relatively few SNAP recipients also receive TANF benefits.

However, while SNAP has indeed grown in size and significance in recent years, TANF should continue to be the basis for determining welfare packages. TANF, and traditional cash assistance, have long been considered the quintessential “welfare” program, and its importance can be seen in legislative history. For example, it was the foundation and focus of the 1996 reforms that are cited as “welfare reform.” TANF is also more tightly targeted at the population we attempt to analyze in this paper; as is often cited, SNAP, in addition to serving low-income non-working families, also serves significant numbers of elderly and disabled people, as well as a higher proportion of working families. For instance, in 2011 almost 17 percent of SNAP households were above the federal poverty guidelines (FPL).

Single adults receive less/this hypothetical family is not representative

It is certainly true that a single adult would receive less than a family, due to the very nature of the welfare programs, but we feel our hypothetical family is more representative. The average household size for TANF in the most recent available data was exactly 3.0 people, while at the same time only six percent of TANF households were only one person. Looking at SNAP, a significant proportion of those single-person recipient households were either disabled or elderly, so a single, nondisabled, working age adult is not representative of that population either. In a larger sense, the majority of the expenditures for these programs are not on these childless adults, so the focus should remain on households with dependent children.

Not everyone receives all the benefits from these programs

Another critique notes that not everyone on welfare receives benefits from all seven of the programs that we included. Therefore, it is said, our study inflated the total amount of benefits.

We agree that not every family on welfare receives all benefits. In fact, the study specifically says, “Not every welfare recipient fits the profile used in this study, and many who do fit it do not receive every benefit listed.” It even included a chart (Figure 16) showing the value of a smaller package of benefits.

Senate Moving Forward with Immigration Reform Bill

Yesterday, senators voted to proceed with debating the immigration reform bill on the floor of the Senate. The Gang of Eight’s bill was amended numerous times in the Judiciary Committee but now it will face input and criticism from the rest of the Senate. There are four big areas of the legislation to watch for amendments and criticisms:

Welfare

Numerous amendments will be introduced to further block non-citizen access to the welfare state. Cato colleagues and I have done a lot of work on this issue, including a forthcoming policy analysis, that has provided some of the intellectual ammunition demonstrating the viability of building a wall around the welfare state while increasing lawful immigration.

Border Security

Senators like John Cornyn (R-TX) are deeply worried that the current bill does not provide enough border security. The current bill adds billions of dollars to an enforcement system that has grown along with the rest of the government over the last few decades. The best way to limit unlawful immigration is to increase legal immigration opportunities, such as temporary guest worker visas and other broader measures. Senator Cornyn’s border security amendment will be crucial for the bill’s political success but will not much affect the policy outcome of the legislation—except to make it more expensive.

E-Verify

With scandals about government invasions of privacy, one would think a national electronic employment eligibility system like E-Verify would raise opposition.  Designed to weed unlawful immigrants out of the work force, the system is fraught with problems and raises numerous privacy concerns that my colleague Jim Harper has explored here.  Given how internal enforcement has almost zero deterrent effect on unlawful immigration, it’s a mystery why so many so-called limited government conservatives support it in the first place.

Legal Immigration 

The guest worker provisions of the bill are too regulated, too restricted, and too limited for workers of every skill category.  Applied retroactively, the proposed guest worker visa system would not be big enough to channel most unlawful workers who came in previous years into the legal market.  Regardless, the immigration reform bill is a step in the right direction for guest workers—albeit a small one.

There are other important policy and political issues going forward, from controversy over the net fiscal cost of immigration reform to the tremendous economic benefits of increasing the number of productive people, but these are the big ones to follow for libertarians and fellow travelers.

IRS Budget Soars

The revelations of IRS officials targeting conservative and libertarian groups suggest that now is a good time for lawmakers to review a broad range of the agency’s activities. Since the agency’s last overhaul in the IRS Restructuring and Reform Act of 1998, its budget has exploded from $33 billion to a proposed $106 billion in 2013. 

Using data from the OMB budget database, I split total IRS outlays into two broad activities: administration and handouts. Administration includes tax return processing, investigations, enforcement, and other bureaucratic functions. Handouts mainly includes spending on “refundable” tax credits such as the EITC. 

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013. Many policymakers favor the EITC as a “conservative” handout program because it encourages people to work. But the EITC itself creates a discouragement to increased work over the income range that it is phased-out. It also adds to tax-code complexity and has an error and fraud rate of more than 20 percent.

The EITC is an example of how big government begets more big government. We certainly wouldn’t need the EITC incentive to work if we slashed all the taxes and welfare programs that currently encourage people not to work. 

It’s a similar situation with other IRS handout programs, such as the $1 billion “Therapeutic Discovery” grant program. These grants are supposed to “produce new and cost-saving therapies, support jobs and increase U.S. competitiveness.” But it would be better to accomplish those goals by repealing the excise tax on medical devices and slashing the high 40 percent U.S. corporate income tax. 

As for the $15 billion in spending on IRS administration, we could dramatically cut that cost with major tax reforms. In particular, a consumption-based flat tax would hugely simplify the code and greatly reduce paperwork costs of the IRS and taxpayers alike. 

Looking ahead, the IRS budget is expected to balloon in coming years as the agency plays a key role in implementing ObamaCare. Unless the health care legislation is repealed, IRS outlays are expected to soar from $106 billion this year to $263 billion by 2023.

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