Taxes

Republicans Audit The Poor:

Just to show you that I take my co-bloggers seriously, I'm going to cite an article by Eric's favorite blog, Dennis the Peasant, which I've been reading lately. This particular article was on a plan to sic the IRS on the poor people of the nation, rather than using their auditors' time and energy to go after the rich and the corporate.

First, the cost of EITC [Earned Income Tax Credit, whereby the government sends "refund" checks to poorer families with children even though they didn't pay the "refunded" taxes to start with -- Grim] over-claims (payments made to taxpayers by the I.R.S. due to taxpayer preparation errors related to EITC) was between $4 billion and $5 billion in for the tax year of 1994. Total EITC payments for tax year 1993 totaled $15 billion. Simple math gets you to the realization that as of 1994, between one of every four and one of every three dollars paid out as EITC were the result of "noncompliance", the term used by the I.R.S. to indicate tax return preparation error. Second, the cost of EITC over-claims was estimated to be $11 billion for the tax year of 1999. In other words, the dollar payout by the I.R.S. for EITC noncompliance more than doubled in 5 years.

I could go on, but you get the drift. EITC has been problematic since its inception 30 years ago. Tax Compliance Measurement Programs in 1982, 1985 and 1988 found significant levels of noncompliance. I.R.S. testing in 1995 confirmed those findings. What all of this does not prove is that noncompliance equates with fraud. While there is anecdotal evidence that EITC is a fraud hotspot, the reality of the matter (to which I can attest on a professional level myself) is that EITC rules are complicated and complex. It would seem the most noncompliance is related to the difficulties in understanding the eligibility requirements, rather than outright criminal intent.

But that doesn’t mean that you simply ignore the problem. For a management perspective, one cannot simply ignore a problem of the magnitude of EITC noncompliance without jeopardizing the integrity of the entire system.

EITC is kind of an oddity in the system. I've never quite gotten the way in which people who haven't paid taxes are due a "refund," though I do understand why the system is in place. Essentially, it exists to make sure that working is a better deal than welfare -- that nobody falls into the category where they and their kids are so poor that they'd be better off not working and take the dole.

So, let's say that it's a reasonable idea. However, a plan to hand out free money obviously has to be intensely regulated because it will be very popular. The result is, as Dennis says, that the rules for collecting the EITC check are very complex and technical -- and they tend to fall upon that group of people which is least prepared to deal with such technicalities, because as a group the poor are less well educated and less able to hire an accountant.

The charge raised against these audits is that it is motivated by politics, by class warfare, by a desire to squeeze the poor in the fashion of That Scurvy Prince John:

If [the author raising a complaint about the audits, T. Christopher] Kelly happens to be right – that increased EITC auditing is not appropriate at this time – it’s not because he actually understands the issue nor has the facts at his command. Most certainly it would be more in the order of a happy (for him) accident. Realistically though, let’s come to the understanding that he’s completely wrong in all respects. But because he has no grounding in fact, and no understanding of the primary issues involved, he has latched onto an idea that everything can, and must, be reduced to the political. There can be no considerations, management, organizational, or whatever, that matter in Kelly’s world... because he can’t fathom what they are.

One suspects that the emotional content of the anti-audit argument is something like this: "These people are working poor with kids, and need the money more than you do. So what if they screw up their taxes and get a little extra money back? They need it. We should just ignore that, and raise taxes on the rich and the corporations to make up the difference."

There are negative consequences for the poor in higher taxes on the rich and the corporate, of course -- just as there are negative consquences for the poor in any sort of higher cost. The benefits arising from "extra" EITC payments probably don't make up for them, and more to the point, can't be assumed to do so: the "extra" payments are going to people outside the class the EITC is meant to help. That's why they're "extra" payments that are not authorized by the rules. The truly poor lose out here. Benefits meant for them are going to others who are not in such a hard case. Meanwhile, the rich and the corporate, taxed extra to make up the difference, push their costs downward. The result is that the lot of the genuine working poor is worse than it was if EITC was administered properly.

I remain convinced that we need to replace the tax system with a far simpler one. Insofar as we are stuck with this one for the time being, however, we have to take a hard look at it. What the emotional argument really wants is higher EITC payments, which in fact is a political issue that they should take to Congress. As much as I love to join in detesting the IRS, an agency I will be only too happy to see the end of if we can arrange a better system, they are not the ones at fault here.