Commentary

Welfare in the Tax Code

This article was published in the New York Post, June 5, 2003.

By some reports, the just- passed federal tax cut favored the rich at the expense of the poor. Yet U.S. Treasury data show that lower-income taxpayers received a larger percentage tax cut than higher-income taxpayers. Families with modest incomes received an expansion in the 10 percent tax bracket, an increase in the standard deduction for married couples and an increase in the child tax credit.

Yet a political fuss has arisen because the “refundability” of the $1,000 child tax credit will not be increased until 2005.

Refundable credits dish out cash to households that don’t pay income taxes - essentially turning the tax code into a welfare system: A non- taxpayer can now get thousands of dollars via the child credit and the Earned Income Tax Credit (EITC). This year’s reform sped up many of the other tax cuts passed in 2001 - but not its expansion of the refundability of the child credit.

Democrats are zeroing in on the “delay” of this benefit because refundability has become a key policy weapon. Few low-income families pay income taxes anymore, but refundability lets Democrats reach this core political constituency with “tax cuts” nonetheless.

In 2002, 56 million tax filers out of a total 150 million did not pay a dime of income tax, according to the congressional Joint Tax Committee. Each recent major tax bill - 1986, 1990, 1993, 1997, 2001, 2003 - took taxpayers off the tax rolls as the EITC and other benefits were expanded.

However, exempting more citizens from tax and mailing them bigger checks is bad policy. For one thing, if over one-third of Americans think that the government is “free,” they’ll vote for too much of it.

For another, refundable credits cause an administrative nightmare: IRS studies routinely find that more than 20 percent of all refundable EITC payments are erroneous or fraudulent. Cash hand-outs attract crooks using ploys such as inventing children to boost tax credits.

Whether Congress expands child credit refundability this year or in 2005, it needs to rethink the welfare system hidden in the tax code.

Chris Edwards is director of fiscal policy at the Cato Institute.