Making Work Pay
Lerner, Preston
Making Work Pay Perhaps his administration's greatest achievement to date, Clinton's expansion of the Earned Income Tax Credit will lift millions of Americans out of poverty BY PRESTON...
...The tax form is too complicated: "It's impenetrable," says Bob Mclntyre, director of Citizens for Tax Justice...
...Still, millions of Americans trapped on the low-skills, low-wages treadmill are missing out on a benefit they ought to be getting...
...Unfortunately, overhauling the Social Security system would probably generate as much support as renominating Zoe Baird...
...But filing separately, each claiming one child, they're entitled to roughly $3,100...
...Instead, they've got to fill out either a 1040 or 1040A and a Schedule EIC...
...The credit is underused: This one's gotten so much play that it's ceased to have much shock value—or to be entirely true...
...His simple but excessively draconian solution is to declare self-employed workers ineligible for the EITC...
...In his presidential campaign, Bill Clinton vowed to "raise the Earned Income Tax Credit to make up the difference between a family's earnings and the poverty level...
...Consider, for example, the plight of the minimum-wage slave...
...By 1996, when the expansion is fully phased in, an estimated $23 billion in EITC payments will be dispersed annually, making the program even more expensive than Aid To Families with Dependent Children...
...What's not to like...
...What about the flaws cited by other critics...
...There are other niggling problems with the EITC...
...Although the plan approved by Congress in August wasn't as ambitious as the one the president had been pushing, it still injects an additional $20.8 billion into the program over the next five years...
...Forman suggests that all taxpayers, regardless of income, ought to receive a Social Security tax exemption on the first $5,000 or $10,000 of earnings...
...This doesn't mean that the EITC is a cure for welfare...
...It's a beacon for fraud: If you didn't work last year, you obviously can't qualify for the Earned Income Tax Credit...
...Which is where the EITC is supposed to ride to the rescue...
...What gives...
...None of the women here knew about it," says Sandra Villalobos, who runs a 110-unit housing project for low-income single mothers in Los Angeles...
...I'm more concerned about the behavioral effect on the families at the bottom...
...This year, those ill-conceived add-ons were sensibly sacrificed on the altar of streamlining...
...It exacts a perverse marriage penalty: True...
...Some, it turns out, are a bit vexing, others are not...
...The reason that less than one-half of 1 percent of all EITC beneficiaries use it is many Americans have a sweet tooth for year-end tax-refund candy...
...As a couple, they earn too much to qualify for the EITC (based on the 1996 tax tables...
...Besides providing more generous benefits, the new EITC also expands the scope of the program to embrace an estimated 20.6 million taxpayers, up from 14.5 million in 1993...
...Even this skeletal review undermines that favorite fulmination of the program's critics—that it discourages people from working...
...Groups that ought to be targeted by future outreach programs include immigrants who don't speak English and others who don't pay income tax, but who still qualify for the EITC...
...The benefits phase out completely at $27,000 (for a two-child family) and $23,760 (for one child...
...But government programs come with trade-offs—administrative and enforcement costs—and this is no exception...
...The way things work now, Social Security taxes are withheld from paychecks and then returned in the form of the EITC—robbing Peter to pay Peter...
...In fact, thanks to various public-education efforts, at least 75 percent and as many as 90 percent of all eligible taxpayers already receive the EITC...
...And while it doesn't completely bridge the gap between the minimum wage and the poverty line, it significantly narrows the margin...
...To be sure, the wordsmiths at the IRS have never been on anybody's short-list of Pulitzer candidates...
...Take a set of parents with two children...
...A simpler idea would be to make self-employed EITC filers sign a document swearing to the truthfulness of their returns—with the penalties for fraud in bold print across the top of the form—then have the IRS audit enough returns, smartly and with sufficient publicity, to keep everyone honest...
...Although he generally supports the new and improved EITC, Steuerle has plenty of reservations about who the EITC helps, how much it helps them, and why it's such a ripe target for fraud...
...fellow at the Urban Institute...
...We are incrementally attempting as a society to move beyond welfare to the subsidization of work, and I think that's good," says Gene Steuerle, a senior Preston Lerner is a Los Angeles-based journalist...
...And like professional bakers confronted with a Sara Lee cheesecake, he, like many other economists, thinks he's got a better recipe...
...Even with the maximum food-stamp entitlement of $3,200 on top of an annual salary of $8,840, a family of four remains nearly $3,000 shy of the poverty threshold...
...It isn't...
...That's probably why it has such a high error rate...
...To me, [the lump-sum refund] is something I can use to catch up on bills...
...Making Work Pay Perhaps his administration's greatest achievement to date, Clinton's expansion of the Earned Income Tax Credit will lift millions of Americans out of poverty BY PRESTON LERNER The Earned Income Tax Credit is the Sara Lee of the federal tax code: Nobody doesn't like it—Democrats, Republicans, liberals, conservatives, neos, paleos, you name it...
...Okay, say Mom and Dad are flipping burgers for minimum wage...
...Filing together, they receive about $2,000...
...Filers with one child and earnings between $6,000 and $11,000 may be eligible for as much as $2,040...
...Also, starting next year, childless workers aged 25 through 64 will for the first time be entitled to a much more modest EITC windfall if they earn less than $9,000...
...Filing separately, their windfall is closer to $4,100...
...On the contrary, you can't qualify for the credit without working...
...I didn't know about it myself...
...Still, Congress deserves a lot of the blame for saddling the EITC with well-meaning but perplexing bonuses...
...It's too little too late: Actually, an advance-payment mechanism—a W-5 form—already exists...
...But if you claim to have earned $8,000 as, say, a freelance writer, you're eligible for an EITC bonanza even if you didn't sell a single story...
...But the IRS has balked at the General Accounting Office's suggestion that it junk the Schedule EIC and allow taxpayers to file for the credit through the 1040 or 1040A...
...And that's only after plowing through the Earned Income Credit workbook in all 36 pages of its mind-numbing glory...
...Starting in 1996, when the new rate structure takes effect, taxpayers with two or more children will qualify for up to $3,370 as long as their income is between $8,425 and $11,000...
...Each adult makes $14,000...
...In 1990, for example, legislators whipped up extra credits for health-insurance premiums and new-born babies...
...For example, no provisions are made for families with more than two children...
...The IRS hopes to enlist more W-5 converts through a new program that allows taxpayers to take some of their benefits in their paychecks and still receive a year-end refund...
...I don't want it a little bit at a time," says Nancy Martinez, who could afford to drop off the AFDC rolls and get a job only because of the EITC windfall she receives...
...But first, a few words from the IRS...
...Now, the press isn't in the habit of applauding politicians for the promises they keep, but on the EITC, Clinton deserves praise...
...This would also solve the Nanny-gate problem for most people," he says...
...But the cure—a more gradual phase-out rate—is worse than the sickness: It will cause program costs to skyrocket, and it won't put a single extra penny into the pockets of the truly needy...
...To paraphrase Churchill on democracy, it's the worst anti-poverty measure around—except for all the others...
...I can do it, but I use a computer...
...According to Robert Green-stein, executive director of the Center on Budget and Policy Priorities, "Even though the EITC increases the marriage penalty for people at higher income levels, it greatly reduces it for a welfare mother with a live-in boyfriend who earns $10,000...
...Unfortunately, 5.5 million Americans live in households dangling below the poverty line even though the head of the household works full-time...
...Mind you, no short forms for EITC filers...
...And because eligibility is based on annual income rather than hourly wages, a high-dollar consultant working part-time can qualify...
...Although nobody knows exactly how widespread the problem is, Steuerle's already coined a phrase—the superterranean economy—to describe it...
...Described as a "work bonus" when it was instituted in 1975, the EITC is supposed to guarantee that Americans who work for a living don't have to raise their children in poverty...
...But the harder you scrutinize the potential solutions, the better the Earned Income Tax Credit looks...
...You think that's an anomaly...
...Jonathan Barry Forman, a tax law professor at the University of Oklahoma, has a kinder, gentler idea...
...As it is, nearly one-third of all EITC filings contain errors, and IRS officials contend—reasonably—that the number would be even higher without the Schedule EIC...
...In a perfect world, of course, we wouldn't need the Earned Income Tax Credit...
...And sure, at higher income levels, corner-cutters who pore over the tax tables may find that they can do slightly better by taking a higher tax credit rather than working a few extra hours a week...
...The question is, which group are you more concerned about...
Vol. 26 • January 1994 • No. 4
