Friday, February 01, 2008

Is EITC just re-distribution of wealth?

Our local elected officials have a big push on in Lucas County to make sure individuals and families take advantage of the Earned Income Tax Credit (EITC). There's even a letter to the editor in the local paper from Lucas County Commissioner Ben Konop and Lucas County Treasurer Wade Kapszukiewicz, who are spear-heading this effort.

But what exactly does the EITC do and is it a re-distribution of wealth from those who pay taxes to those who don't?

I started with an Internet search and found a website that helps you determine eligibility and estimate an amount of EITC for which you may qualify. But using that site required earnings, and other financial data, so I created a hypothetical and here's what I found.

My hypothetical is a single mother earning $8/hr. in a 35 hour/week part-time position. She has 1 child, no alimony nor other income. Her yearly gross income would be $14,560. According to 2007 withholding tables, if she claimed 2 exemptions (herself and her child), she would have had $510.50 withheld from her pay for federal taxes.

If she used the 1040EZ form, filing single, she'd be able to use the standard deduction of $8,750, making her taxable income $5,810. (I did not calculate her taxes using a standard 1040 form so I do not know if the form used would have made a difference in her taxable income.)

According to the tax tables, she would owe a total of $583 on taxable income of $5,810. As she already had $510.50 withheld, she'd be writing a check to the federal government for the difference of $72.50.

But ... she's eligible for the EITC - an estimated amount of $2,850.

The way the form is set up, that $2,850 dollar value is a credit and gets added to what you've already paid in taxes through your withholding. This gives my hypothetical mother a total of $3,360.50 'paid' ... significantly more than the $583 the tax tables show she owes.

So, in this example, my single mother will be getting a refund of $2,777.50.

Now, she only paid $510.50 and she owed $583...but she'll be getting a check from the government for $2,777.50. That's 48% of her taxable income that she's getting 'back.'

We all know that government has no money of its own - only what it collects from others. This means that people who pay taxes are the ones who are giving this 'refund' to my single mother. And by 'pay taxes' I mean all of us who have taxes withheld and either get back less than what we paid in - or actually owe more (on top of our withholdings) when we prepare our 1040s.

In this example, the EITC is a re-distribution of wealth. And I cannot help but wonder why we, as a nation, think this is okay, acceptable, appropriate, fair, or any other word you'd like to use to describe this action.

And does anyone else have a problem with our elected officials going around and telling people to claim this re-distribution of wealth in the guise of 'bringing money into our local economy'? From the letter to the editor:

"Families and individuals deserve to keep what they've earned and this free tax preparation will make that happen.

Even if you don't qualify for the EITC, the benefits to our local economy are enormous. The EITC is truly the best economic stimulus available. If everyone who qualified for this money took advantage, we'd bring millions of dollars into our local economy, supporting local businesses, jobs, and wages
."

Um - I'd like to keep what I earn as well, but this program makes my family pay so others can have our money instead.

Your thoughts?

14 comments:

Libertarian Jason said...

I am a part-time tax preparer, and I totally agree. The EITC is wealth transfer.

Right Wing Toledo said...

Of course it's a direct, blatant transfer of wealth. However, it has been depicted as tax relief for 'the working class', as if doctors, engineers, and lawyers don't work - ok, perhaps lawyers don't qualify. The very concept of a wealth transfer fits neatly into the liberal paradigm of "equality of outcome."

Tim Higgins said...

Maggie,

Why should we be surprised at wealth redistribution at this point, or that liberal politicians spearhead a campaign for taking advantage of it? The EITC is simply another version of "bread and wine for the peasants", a philosophy that has worked for thousands of years for elitist politicians who can look down their noses at the poor while simultaneously claiming to be "one of them".

Such policies are neither admirable or equitable, but they have been proven to be successful on a populace who chooses to remain ignorant while accepting a free ride on the gravy train.

(By the way, do you think that I have injected enough pointless platitudes into the discussion?)

Maggie Thurber said...

Lol, Tim...I love your pointless platitudes.

I guess I'm just wondering. If you know that you're getting money that someone else has paid, do you take it because you can? Or do you forego it because you can?

I'm not sure what I would do if I qualified...after all, it wouldn't be my fault that the federal government wrote the rules that way... hmmm...

Tim Higgins said...

Maggie,

Ah, the dilemna of making proper choices in a modern society. For those of us who took philosophy in college (and are old enough to remember it being taught in the original Greek), this is where it gets fun.

This question is a great example of the dicotomy between morals (guidelines that change with society) vs. ethics (the unchanging rules of right and wrong). Ethically, it would be wrong to take money that you don't deserve and does not belong to you. Todat's morality however, allows the cop out of simply going along and taking the money because the government says it's OK.

Unfortunately, down that path lies the assumption that the government is moral, ethical, and more importantly, right. I think that we both know the answer to that one.

Of course, this is my way of saying that I too am glad that this is not a decision that I have to face.

Maggie Thurber said...

Nicely said, Tim...

Chris said...

Did you feel the same way when Ronald Reagan expanded the EITC in 1986?

Maggie Thurber said...

I was still in school in 1986 and probably didn't have a clue. So I can't answer your question of what position I took back then.

However, let me emphasize that I don't care who did it or expanded it or what party they're from.

Unlike some others, I don't defend wrong actions simply because they're taken by someone who has the same party affiliation as me.

It's wrong to expect that my family needs to pay taxes but other families get more back than they've paid.

One, it's not fair - and fairness seems to be what so many of the arguments are about.

Two, if it's good for such eligible families to keep their money, it's obviously good for me to be able to keep my money as well.

Three, it's a thinly-veiled effort to re-distribute income from those who earn money to those who don't (or earn less) ... and that's never been 'right.'

If I want to participate in charity to help those less fortunate than me, I'll do so (and, in fact, I do). But I'll decided who gets my money and for what purpose...the government doesn't need to do it in my stead.

And our local elected officials are actually encouraging people to file for this and take other people's money. What they're really saying is that it's okay for the government to tax people in order to give that same money to others...when did that become 'right'???

Tim Higgins said...

Chris,

The short answer is yes as Maggies says. Doing the wrong thing is still wrong no matter who you are or what principles you are said to have stood for.

Of course the Democratic-controlled Congress of the time, which creates both legislation and budgets, might also need to share equally in the blame.

DeeDee Liedel said...

Maggie - unfortunately your numbers are not correct and my answer (using professional tax prep software) is even more enlightening. Any of the federal forms (1040, 1040A, or 1040EZ) will give you the same answer, assuming you qualify to file a simpler form. As a single with a dependent, your hypothetical mother would not receive all tax advantages filing the EZ and should probably file the 1040A.

Your hypo would actually owe $0 in federal income tax, because she would qualify for head of household filing status (which gives you a larger standard deduction) and two exemptions. So right off the bat, she is going to get all of the $510 she paid in back.

Now let's go to the EITC. Your estimates are correct - she is eligible for $2853 of EITC, all of which is refundable.

But wait - you also have the Additional Child Tax Credit which equates in to another $422 refundable to your hypo mom.

All total, she will receive $3,786 back in a tax refund. When the EITC was expanded years ago, it was done on the theory that it was not "fair" for these low-income taxpayers to have to pay social security taxes (at 7.65%) when they were making so little, so that was part of the credit refunded. But then they expanded it more to include refunding to the worker the portion of social security tax paid by the employer on their behalf! (another 7.65%)

So, if you take her taxable wages of $14,560 x .153 = $2,227.68; her EITC is $625 more than what was paid on her behalf in to social security (but she still gets full credit for it in the social security system).

Reality is that EITC is one of the largest fraud areas of the tax code. Kids are swapped to friend and relative tax returns where they get the most benefit; phantom self employment income (or loss) is reported in order to maximize refunds, etc.

The EITC is also counterproductive in encouraging lower-income people to improve their circumstances. As the EITC phases out (as you earn more money), your marginal tax rate approaches 50% (despite being in the 15% tax bracket) so you lose 50 cents of every additional dollar earned to increasing taxes. This only encourages people to not make more money, the total antithesis to a capitalistic society.

Maggie Thurber said...

Dee Dee - I considered doing the example with her filing as 'head of household,' but didn't want it to look like I was purposely trying to show an extreme example...

Thanks, though for all the extra information - not having kids I didn't know about these extra credits.

And the EITC was supposed to offset Social Security??? How is that right? If you expect to get something out of the system some day, you should definitely be expected to pay into it.

As it is, I pay into the system but sincerely doubt it will be functioning by the time I'm ready to withdraw anything from it.

But I go back to the question - how is this right????

Chris said...

Tim, I'm not quite sure anyone is to "blame" since most people don't think it's "wrong".

There's a certain percent of the population (minority) that will always have problems with anti-poverty programs. These programs help alleviate some of the debilitating inequalities that capitalism is naturally prone to create. The tax code already favors the investor class, so I wouldn't expect much sympathy.

Tim Higgins said...

Chris,

These programs help alleviate some of the debilitating inequalities that capitalism is naturally prone to create.

I'm sorry, I dont' want this string to get off topic, but a comment like this is mind-boggling! You seem like an intelligent and well-educated person, so I will simply pose this question:
If capitalism creates debilitating inequalities, what system would you propose as an alternative?

Chris said...

Tim, I think capitalism is the best economic system man has come up with so far. However, I think certain amounts of regulation are needed.

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