America's Best-Kept Welfare Secret

...Furthermore, unlike AFDC, there is no asset test for EITC...

...Although the EITC will surpass AFDC in cost by 1997, the low-profile program has the kind of bipartisan support that should always make taxpayers wary...

...The EITC is designed to insure that families who work year round will at least reach the poverty line," says Hammond...

...Of course, one reason work appears not to pay is that welfare is so generous...

...If your normal tax bill is ten dollars, and you're eligible for a two-dollar child-care credit, you simply pay eight dollars in taxes rather than ten...

...Corruption Some hustlers used phony addresses, stolen or phony Social Security numbers...

...The Threat to Liberty to audit taxpayers suspected of hiding significant amounts of income...

...Surely our wealthy nation ought to makethings easier for such people...

...the money is a "bonus" for working, unlike AFDC, for which people Perhaps the nation enthusiastically agrees with Robert Shapiro, the "new Democrat" economic guru at the Progressive Policy Institute, who says, "No American family with a full-time worker should have to live in poverty...

...In a political culture where the cynical expectation is that all programs are permeated by some degree of waste, fraud and abuse, the EITC, with its current 30-45 percent ($5-6 billion) fraud rate, is in a league by itself...

...According to studies by Marvin Kosters of the American Enterprise Institute, an expert on EITC, almost 90 percent of those who receive EITC cash payments pay no federal taxes to begin with...

...Regular taxpayers are generally reluctant to file by computer, because there are no safeguards to ensure that the information you file doesn't get changed once it reaches IRS headquarters, and in all criminal tax prosecutions the burden of proof is on the taxpayer...

...If you qualify for the EITC, and you owe $5 in taxes, you might, for instance, get a $10 "refundable tax credit...

...There is no asse You could have boat and s only qualify by not working...

...they are not the result of forces of nature...

...Without blaming women who find themselves in such circumstances, most of whom are doing the best they can, it is important to keep track of the economic costs of social problems such as divorce and illegitimacy...

...In a paper published last November, John Karl Scholz, an economist at Wisconsin's Institute for Research on Poverty, called EITC "the cornerstone of the Clinton Administration's welfare reform agenda...

...The implication—at least as I see it, though I doubt he would agree—is that for some people sticks such as a welfare cut-off may work better than carrots...

...Former DLC leader Bill EITC creates a disincentive to work, Scholz maintains...

...Many families not in the labor force are not on the margin of working," Scholz notes in a recent study...

...Who Should...

...Democrats see it as a way to offer "income assistance" to what used to be called "the deserving poor"—those earning just enough not to qualify for welfare—without having to expand AFDC itself...

...Street entrepreneurs and members of the criminal underclass must have felt like prospectors stumbling on gold nuggets glittering in a riverbed...

...Just as a great many people in Washington think that it makes sense to use the military to deliver humanitarian aid, because it is more efficient than the average relief organization, so politicians are enamored of using the IRS to deliver social services...

...the rest are the second or third wage earners in their families...

...The third divergence between the EITC proponent's claims and the truth, as astute readers have already noticed, is that the program is not limited to workers whose incomes fall under the poverty line...

...Food, stamps cost another $40 billion annually...

...By 1998, the paper pointed out, EITC is expected to cost the federal government $24.5 billion per annum...

...These cases got pushed to the back...

...EITC cheaters] are often street criminals who can file fraudulently and take money from the system...

...In his opening statement in February 1994 hearings on refund fraud, former oversight committee chairman J.J...

...And we're back to the question of priorities...

...There is a tremendous social benefit to supporting workers, and, thereby, the work ethic...

...There were other fabulous schemes...

...I n July 1993, Health and Human Services secretary Donna Shalala announced a major expansion of the Earned Income Tax Credit (EITC) program, which gives cash supplements to people who make too much money to qualify for Aid to Families with Dependent Children—or AFDC, the nation's primary welfare program...

...The EITC is widely understood to be for the benefit of full-time, year-round, low-wage workers supporting families...

...It is regarded by both liberals and conservatives with the same uncritical reverence as Head Start—and, like Head Start, its great selling point seems to be that while no one can prove EITC does any long-term good, it doesn't seem to do great harm either...

...Look, the problem is that the IRS doesn't have enough auditors...

...These are not new truths, but they don't seem to have been learned yet, either...

...Economists call this universal trade-off among people getting free money the "income effect...

...Far more innovative fraud was encouraged by the IRS's new electronic filing procedures...

...It is a cautionary example of a great truism of the welfare state: any program that starts out transferring money from those who earn more to those who earn less, even for the best of reasons, will ultimately be co-opted and turned into a general welfare program...

...Again, according to John Karl Scholz, who has written extensively on EITC, half of the recipients have incomes above the poverty line...

...Under the generous Clinton expansion announced by Shalala, the rates of the credit will be increased by one-third by 1996...

...In early 1992 she ordered DDIs to be stopped, because they were the direct catalyst for much of the program's fraud...

...The system lends itself to abuse when it gets larger," he says...

...Over the years, small-time EITC fraud has involved obvious schemes such as a husband and wife, each with a qualifying income, filing as if they were divorced, and both receiving the credit...

...It's important to note that there is a serious problem among men with high-school (or less) education, whose incomes have remained stagnant for two decades...

...For Once, the Experts Agree Remember: the reason politicians love this program is that it encourages people to work, not loaf...

...For all these reasons, when the House Ways and Means Committee wished to investigate the fraud, they bypassed top IRS officials and went straight to then–Treasury Secretary Bentsen...

...Cl The American Spectator April 1995 29...

...Because the EITC makes their incomes higher, they are likely to buy more leisure...

...When that ridiculous number became the subject of hearings last year in front of the House Ways and Means [IRS] Oversight Subcommittee, former secretary of the treasury Lloyd Bentsen admitted there had been little or no accountability or monitoring in the program...

...In 1994, a worker with one or more qualifying (dependent minor) children and an income up to $25,296 was eligible for some credit...

...Pickle of Texas said, "In my judgment, the IRS has almost perfected the art of using its computers to give out tax refunds quickly, without making a corresponding effort in the area of fraud control...

...And many do work hard for not much money...

...It demonstrates, too, just how many obstacles even minor social engineering runs up against, even when the goal is the simple distribution of cash...

...The message from many senior managers at the service centers was that questionable claims should not be held back unless the reviewers were absolutely sure that the claims were fraudulent...

...But does it really...

...See sidebar at left...

...Studies at the time showed that such programs invariably diminish the amount of work people are willing to do to support themselves...

...A second fact that erodes the compelling picture of mom and dad battling inexorable economic forces is that roughly half of the families that receive EITC payments are headed by single mothers...

...Bruton tells of refund anticipation loan centers springing up in used-car lots—so that people could file their EITC claim and drive away in a Chevy...

...People's preferences are such that as they have more income, they buy more of the things that they like, and they like leisure...

...Now that the Clinton administration has allowed single, able-bodied workers with no dependents to claim the credit for the first time, many students who work part-time qualify for some level of cash grant...

...As a small political footnote, "New Democrat" support for EITC originated as a "progressive" alternative to raising the minimum wage, which, Robert Shapiro has argued, is an inflationary action that hurts more poor families than it helps...

...Unlike any other tax credit—with the arcane exception of the "off-road motor fuel tax credit" (which also has an enormous fraud rate)—the EITC is a "refundable credit...

...The name itself is so eye-glazingly technical that when it appears in print readers pass over it without noticing, assuming that it is tax arcana and not a welfare program...

...Slightly more creative chicanery involved people filing requests for employer ID numbers (which are utterly routine and never checked), making up a company, filing phony W-2 forms, and collecting the cash refunds...

...The University of Wisconsin's Scholz, who is an enthusiastic supporter of EITC, says the program offers "an unambiguous incentive for the non-working to start working, because the EITC increases their after-tax wages substantially...

...DDI allowed banks and some tax preparers to offer loans, using the DDI as collateral...

...It is designed to be the amount of credit equivalent that will pull your income up to the poverty level, depending on the structure of your family...

...Toward the end of a long interview, Jim Bruton, a man whose conversation reveals a passion for liberty and an ingrained distrust of state power rare in a political official, said, "When we take people's money under threat of punishment, aren't we obligated to be careful about where it goes...

...He explains that "any level of income can be attained by working less than would be required in the absence of an EITC payment...

...While the magnitude of the fraud was well known enough that Richardson should have been aware of it, much of the blame must go to the permanent bureaucracy at the IRS, which has been criticized for intransigence, internal bureaucratic feuding, and an institutional culture that does not allow for the admission of problems...

...In 1991, when Shirley Peterson moved from the Justice Department to head the IRS, she brought along a sophisticated understanding of the problem...

...Even if the IRS had the resources to check more returns, it generally chooses increases because the government is giving away money...

...EITC is not like any other tax credit you've ever heard of...

...Ninety-nine point five percent of EITC recipients," the study continues, "receive the credit in a lump sum after filing a tax return, so the links between earnings and benefits . . . are likely to be less clear to recipients...

...Perhaps we wish to subsidize the working poor all the same.workers and their children from falling into poverty as a result of government tax policy...

...In recent years the IRS has been given the task of collecting student loans and child support payments, garnishing wages, and the like...

...In most of the country, for instance, $25,000 is understood to be a solid lower-middle-class family income...

...The Earned Income Tax Credit makes an apt case study precisely because the program is not extremely big, overreaching in its goals, or fraught with the emotional baggage of AFDC...

...The American Spectator April 1995 25 But with a refundable credit, you pay no taxes at all, and then Uncle Sam sends you five bucks in the mail...

...While such families may require assistance, it is unclear why society should be perpetually required to compensate for people's lack of comfort...

...He suggests that the program invites fraud in a way the normal tax-return process does not, because the program gives out money directly to filers, instead of the more usual arrangement in which a refund is disbursed after taxes are paid...

...In one Midwestern city, when business got slow for a network of illegal drug dealers, the dealers helped clients file for the EITC...

...two single mothers who don't work (and may receive AFDC) pretending that they are each paid to look after the other's children...

...Jeff Hammond, an economist at the Progressive Policy Institute, the think tank of the Democratic Leadership Council, articulates this wishful understanding with evident sincerity...

...Soon street gangs in Los Angeles were preparing neighborhood tax returns—for a cut of the EITC refund loan...

...That is why, for example, state departments of health and human services have armies of caseworkers assigned to monitor each AFDC recipient...

...That means that incentives don't overcome everyone's decision not to work...

...people with illegal income filing tax returns and getting the credit...

...Across the country, people whom liberals believe cannot hold a job were impersonating tax preparers and helping the Clinton administration achieve its goal of helping the working poor...

...He also believes that the EITC's stratospheric fraud rate is due to inherent vulnerabilities in the program's current size and form...

...It goes well into the middle class...

...Since people with incomes under the poverty line do not pay federal income taxes, you can qualify for EITC without having much, or any, tax liability to begin with (besides, of course, the payroll tax...

...If it were small there would be much less fiddling around...

...Even without its staggering fraud rate, the plain fact, as we shall see, is that EITC is not a refund of taxes paid, but merely a transfer program for people who are too successful to qualify for welfare...

...Some hustlers used The American Spectator April 1995 27 phony addresses, stolen or phony Social Security numbers (the IRS sent the refunds even when they noted that the number was incorrect...

...The catch is that you actually have to pay taxes for such a credit to do you any good...

...In response, the administration, perhaps fearful of scandal on the eve of the election, dispatched top officials to smooth over and de-emphasize the report, even as they were making it public...

...One common trick was to steal Social Security numbers from the files of school children at public schools...

...As Donna Shalala maintained in congressional testimony in 1994, "The EITC is essentially a pay raise for the working poor...

...Bruton thus became one of the nation's leading experts on the types and extent of EITC fraud...

...They don't even have to earn low wages...

...Among the first moves made by the incoming Clinton administration—and new IRS Commissioner Margaret Richardson—was to reverse that decision and restore the DDI...

...That's why, after almost twenty years, only dedicated policy wonks know the program exists...

...Asked whether the EITC's fraud rate makes a difference in the utility of the program, Jeff Hammond, the economist at the Progressive Policy Institute, answered, "If 90 percent of eligible workers are receiving it, that's a great success rate...

...Not everyone involved with the EITC shared Bruton's concerns...

...It's difficult to argue with the sentiment that says that people who work very hard to support their kids but don't make a lot of money ought to do better than people who take welfare...

...The IRS generally only discusses fraud that it has discovered in conjunction with punishment it has meted out...

...Within mere hours of filing a return electronically, thefiler would be notified of the amount of his refund with DDI...

...Furthermore, Kosters asks the one question never heard in Washington: "Suppose it's a good idea...

...Isn't this ultimately the most pernicious cost of the welfare state...

...Marvin Kosters, who for a decade has been the only expert on the EITC to testify against it, agrees that the disincentives are as strong as the incentives...

...Bruton and his boss, Shirley Peterson, then–assistant attorney general for tax, noticed an increase in fraud reports coming in from around the country, resulting, he speculates, from an expansion of EITC that took effect that tax year...

...According to Bruton—and to other senior Bush administration officials at Justice and the IRS—the problem began to escalate in 1990...

...people filing with wholly fictitious children...

...Shalala billed it as the keystone of the Clinton administration's plan to reform welfare...

...It's not our fault if the IRS can't administer it effectively...

...When advocates argue that welfare only costs $24 billion a year, they are merely referring to AFDC...

...The term "fiddling around" is quaint and delicate when it comes to a discussion of the huge rate of chicanery in the EITC...

...If you include all of the other programs—including EITC, Volunteer Grandparents, daycare, etc.—the stunning cost of welfare reaches the neighborhood of $350 billion a year...

...But, as one official said, "the maximum fraud in most of these cases was about $2,000...

...Other than conducting a complete audit, there is no way to determine whether someone who claims the EITC is, in fact, eligible for it...

...Indeed, recipients who are already working work less when they receive this additional cash supplement...

...But he's doing the right thing...

...Workers who earn more get a smaller payment, up to an income of $27,000, at which the credit is phased out...

...28 The American Spectator April 1995 Writing in Tax Notes Today in October 1994, reporter George Guttman—who broke the scandal in the tax community—revealed that, according to Joe Santavicca, a recently retired employee of the Criminal Investigation Division, "The onus was on CID employees to do nothing that slowed the electronic filing process...

...Clinton administration economic policy, including current tax-cut proposals, is focused around this issue...

...Both of those conditions arise from decisions made by individual men and women...

...Adding more auditors imposes a non-monetary cost that citizens interested in liberty should find unacceptable...

...Even while a hotly contested election was underway, with government spending a key issue, the mainstream media devoted almost zero coverage to these public revelations...

...When we did have such a debate—during the Nixon administration—over what was then called the "guaranteed annual income," or a similar plan, the "negative income tax," these radical redistribution programs were rejected...

...The only aspect of this scandal that attracted attention—and not much at that—was the revelation that illegal immigrants were eligible for EITC benefits, and hundreds of thousands of them were receiving these cash grants as a gift from American taxpayers...

...Finally, the fact that IRS administers a cash giveaway program with a 30-45 percent fraud rate—and the shocking fact that President Clinton would expand such a program—gives a fair indication of just how much contempt the powers that be have for those who continue to pay their taxes, either voluntarily or because of the coercive power of the state to send those who don't cooperate to jail...

...Who Gets It...

...But while some working families fit this picture, they aren't the majority of EITC recipients...

...But when did the American taxpaying public agree to institute a second tier of welfare...

...Word of the scheme spread quickly...

...The possibility of complicated fraud emerging is greatly encouraged by the generosity and size of the thing...

...Helping the Inner City Help Itself Jim Bruton, a Washington attorney with Williams and Connolly, served during the Bush administration as deputy assistant attorney general in the tax division of the Justice Department—i.e., the office that oversees the prosecution of all federal tax-fraud cases...

...But Kosters's objections to the program are not limitedto its efficacy as policy...

...As cases came in from IRS field offices, she made sure that the local U.S...

...It is another one of the unique aspects of EITC that experts on both sides of the ideological divide report precisely the same findings...

...So, in 1996, a worker who earns $11,000 will get a bonus of $3,370...

...That means that, at the maximum level, EITC will give recipients roughly 40 cents for each dollar they earn...

...The IRS has traditionally been reluctant to discuss tax fraud since it has a large stake in conveying a sense of omniscience, considering that we still have a largely voluntary compliance system...

...but in a society based on a high degree of liberty and privacy, there are very troubling implications to broadening the scope and power of the institution most hostile to privacy, one that already has the coercive power of the state behind it...

...As Bruton put it, "As soon as a program distinguishes between people who get and people who don't, you have to have a policing mechanism...

...The internal political culture of the IRS is not conducive to admissions of massive failure by one or another competing department...

...It would cost the government more than the amount of the credit to investigate whether or not the recipient was eligible...

...In reality, that cost is imposed on their fellow citizens...

...In a 1989 report, Shapiro noted that only one-fifth of minimum-wage workers are poor...

...Does that mean the bigger the better...

...What could be more laudable...

...For obvious reasons, the IRS cannot and does not discuss fraud that is successful...

...Not just criminals but even legitimate banks and tax preparers, such as H&R Block, were doing a land-office business with the refund-anticipation loans...

...Contrary to the claims of EITC's political advocates, for instance, workers do not have to work full-time or year-round to qualify...

...Only 20 percent of married, two-parent families with children earn less than $25,000 per year, whereas 75 percent of all families headed by single mothers live on $25,000 or less...

...I think not...

...The income cutoff is very high relative to average wages...

...It is harder and harder for them to support families decently, even with working wives...

...This ensured that the massive fraud would continue, just as President Clinton was expanding the program...

...The IRS is staffed so that only one percent of all tax returns are audited in any given year...

...In response to congressional pressure, Richardson suspended the DDI last December 28, creating havoc in the current filing season...

...In its original form, the program prevented a fairly small number of t test for EITC...

...Usually tax criminals are white-collar, or simply people who underreport, or don't pay their taxes...

...She failed to add that it was a pay raise taken out of the pockets of other working Americans whose real incomes also have not seen major increases...

...And provisions in the GATT treaty passed last December will stop EITC benefits from going to non-resident aliens as well as prisoners...

...These "refund anticipation loans" fueled major economic activity in the inner cities...

...Suspicion of fraud in many instances was not enough...

...26 The American Spectator April 1995 Clinton expanded EITC in 1993, but has since proposed a $1.15 raise in the minimum wage, which seems to indicate that he only takes sophisticated "centrist" arguments seriously if they advocate redistribution...

...One common trick was to steal Social Security numbers from the files of schoolchildren at public schools...

...One can only guess that this extraordinary example of government malfeasance and lack of accountability with 24 The American Spectator April 1995 taxpayer money got no attention because the EITC is so perfectly camouflaged...

...The EITC was intended to refund the Social Security (FICA) tax, and to make sure that recipients got credit as if they had paid into Social Security...

...Hammond describes the target recipient as "a person who works very hard, makes the minimum wage—which doesn't get you to the poverty level if you have kids...

...Peterson, say colleagues, was particularly interested in dealing with the problem...

...What does it take to qualify for this extra spending money...

...People's preferences are such that as they have more income, they buy more of the things that they like, and they like leisure...

...You can work part time...

...IRS may well be more efficient than the Health and Human Services Department (who would doubt it...

...Under normal conditions it takes a couple of weeks...

...He's setting a good example, even though he could go on welfare...

...You can work seasonally...

...The media failed even to report that prisoners were eligible for it...

...You could have a house, car, and boat, and still qualify...

...attorneys were apprised of them...

...The most rigorous study, conducted last year at the Institute for Research on Poverty at the University of Wisconsin, indicates that EITC creates as much disincentive to work as incentive...

...Despite the fact that it has been in existence, in one form or another, for nineteen years, there have been few studies of EITC' s actual effects...

...He recommends simply excluding low-wage workers from all federal taxes or restoring EITC's original plan to simply refund payroll taxes...

...Legitimate recipients are often genuinely poor—of that there is no question...

...The subcommittee's records are full of such colorful anecdotes, by tax-preparers currently residing in federal prisons...

...Clinton adminisLisa Schiffren, a former speechwriter for Vice President Dan Quayle, is a writer living in New York tration officials themselves—including Bentsen and IRS commissioner Margaret Richardson—admitted that the fraud rate might be as high as 45 percent...

...You can work part of the year, receive AFDC part of the year, and qualify...

...Most of them reduce taxes dollar for dollar, like a grocery-store coupon...

...As former deputy assistant attorney general Bruton put it, "Every time we establish a new crime, we're creating a new mechanism for the government to check up on you...

...This is worth noting because, in the relentless drive never to offend women, it is forbidden to mention that single mothers—especially those never-wed mothers and even those not on welfare—have a very hard time supporting children adequately...

...The maximum credit, for a worker with two children and a salary of $11,000, was more than $2,500...

...The "systems people" at the IRS, who were gung-ho about electronic filing and whatever it would take to expand it, were engaged in destructive internal squabbling with the Criminal Investigative Division (CID), which naturally felt that fraud should be prosecuted...

...According to one former IRS official, she was extremely frustrated to discover that the IRS's antiquated computer system made it impossible to trace the eligibility of EITC applicants efficiently...

...But the IRS, eager to shift to electronic filing, created a special inducement to use the new system—the Direct Deposit Indicator (DDI...

...The EITC, he says, has "created a new type of tax criminal...

...Yet it remains questionable whether a problem of the re-organization of the nation's economy will be solved with personal subsidies...

...For most of them, economic hardship is traceable to predictable reasons, not random bad luck in the face of tenacity...

...The great claim for EITC is that the program is a way of helping the poor without undermining their work ethic...

...Her announcement came despite admissions by the Internal Revenue Service, which administers EITC, that the fraud and error rate in the program was at least 30 percent, and perhaps as high as 45 percent, adding up to $6 billion yearly...

...But at a time when the nation seems to be concluding that Great Society transfer programs have created as many problems as they've solved, at tremendous and unsustainable cost, it's important that our leaders put the dozens of means-tested redistribution programs on the table for re-evaluation...

...Bruton adds, "It costs roughly $3,000 for the IRS to send a criminal investigator to check up on a filer...

...A group of immigrant cabdrivers in Texas was caught doing the same thing...

...Your tax dollars flooded back into the ghetto within hours, sending drug sales booming...

...attorneys have long dockets...

...the payments are supposed to make up the difference between their yearly income and the national poverty level...

...As should be obvious, the value of benefits far exceeds restitution of the 7.5 percent tax on wages that workers contribute to Social Security...

...When did our leaders conduct a national debate over whether we wished to permanently subsidize all workers at the low end of the pay scale to make sure their incomes reach a guaranteed minimum level...

...Republicans like it because giving out cash in the form of exaggerated tax "refunds" to people who are already working, if only part-time, seems so much neater and less liberal than doing it through the standard welfare system...

...But for those already working, EITC creates a disincentive to work, Scholz maintains...

...The IRS was entirely aware that this fraud was going on...

...a house, car, and till qualify...

...people under-reporting income to maximize the amount of the credit they get...

...If there's some fraud, we can't help that...

...The GAO (General Accounting Office, Congress's main oversight ann) issued a report this past October, citing the astonishing fraud rate...

...In addition, most of these workers are also eligible for food stamps and, in many places, subsidized housing...

...Does it mean that any structure is just as good...

...That's why the program is administered by the IRS, and why EITC payments take the form of a "refundable tax credit," even though, as with so many income redistribution programs, the rationale and goals for the EITCand, more importantly, its size—have expanded several times since the program's inception...

...When questioned about the vulnerability to fraud inherent in the program's structure, Hammond replied testily, "We just design the ideas and the policy...

...After a particularly large jump in the Social Security payroll tax, officials worried that people with incomes near the poverty line would be driven into poverty by federal taxes...

...For them, the program simply amounts to a cash bonus...

...Lisa Schiffren America's Best-Kept Welfare Secret What are Republicans doing supporting the Earned Income Tax Credit, a 20-year-old, fraud-riddled giveaway that makes AFDC seem positively civilized...

...With a normal credit you would simply not pay the $5 you owe...

...So the government increases its size, power, and ability to intrude into citizens' private financial affairs in order to fight the corruption...

...They even lobbied to maintain the DDI well after the fraud had surfaced...

...AFDC, in contrast, will cost $16 billion yearly...

...Do we want the already overly powerful tax collection agency to have additional enforcement powers...

...Where EITC Came From The Earned Income Tax Credit began, innocently enough, in 1976...