Hearing on Improper Payments in the Administration of Refundable Tax Credits
Thank you, Chairman Boustany and Ranking Member Lewis, for the opportunity to submit comments on this topic. I will leave it to the scheduled witnesses to outline the current situation and its causes and will address my comments to how we can do things better in the future.
It is no surprise that there is a significant fraud problem in this area. The tax code provisions which provide these credits are not easy to understand for the average tax preparer, let alone for the working poor population eligible for these credits. This drives most of those eligible toward paid preparers with no certification requirement who often charge a premium for their services and for the inevitable refund anticipation loans. Because interest on such loans is a percentage of the total refund, preparers have every incentive to stretch the truth.
While tax reform may simplify how these credits are determined, they cannot be simple enough for those who are less literate as a rule than the general population. Indeed, many are not literate at all in English, so they don’t really understand what they are signing. Unless tax forms are available in Spanish and a multitude of other languages (Korean and Eritrean are very popular in my neighborhood as well), removing these credits from personal income taxation – and indeed removing the need for most people to file at all – seems to be the only real solution. Throwing more money at the IRS enforcement budget does not get to the root of the problem at all. A four pronged system is called for.
The first prong is a Value Added Tax (VAT) of between 10% and 15%, which should be a replacement for low rate income taxation rather than being a supplement to it. In the transition, net wages could be increased by the rate of the VAT so that consumers are not unduly burdened – while still being conscious of taxation, as the tax total can appear on the receipt, as sales taxes do now. It would be all the better to have this tax fund discretionary military and civilian spending, making the pursuit of pork less attractive to Members and constituents alike.
The second prong is a VAT-like Net Business Receipts Tax. It would be on the same base as the VAT (wages and profits), but would have deductions and credits – among them the health insurance exclusion, additional credits from the Patient Protection and Affordable Care Act and an enhanced refundable Child Tax Credit.
The expanded credit would be paid by employers with wages, rather than through tax refunds and would not depend on the base wage (which would be lower with the credit factored out – although the wage cuts would be on the higher end of the scale – indeed, the minimum wage should be increased so lower wage workers are paid by more than their credits).
If the home mortgage interest and property tax deductions were not retained and the same amount transferred to this credit, along with the end of the tax exemption for children, the Child Tax Credit could be expanded to $500 per month per child. That is roughly half the cost of raising a child. States could give a credit for the other half in some areas, with some states requiring much less to cover the cost of living.
Note well that such levels would undoubtedly reduce the need for abortion and contraceptive services, so that supporting this proposal should be counted as a must-support for a perfect pro-life rating. It would also, by encouraging more children and better housing, bring back the economy in the short term and solve our entitlement crisis in the long term by ending the aging crisis.
This tax would replace mid-range income tax revenue, the Corporate Income Tax and the payroll taxes for Survivors under 60, Disability Insurance and Hospital Insurance. This tax would cover all entitlement and non-entitlement/non-OASI social spending. The rate would be 27% after exclusions and 33% with exclusions. These are the balanced budget rates. They will go lower as programs which duplicate the enhanced benefits are eliminated or turned into additional tax credits – an employer credit for both college and elementary education come to mind. Additionally, in the short term and in similar economic times, income tax revenue and borrowing could supplement this category of spending.
In the transition, this tax would lower net wages to account for the tax benefits for children, plus the loss of certain deductions by higher income individuals, as well as gross wages, which would be lowered to the net wage plus Child Tax Credits plus the OASI contribution, which would be the third prong and would be increased to 6.5% for individuals and employers (with the option that the employer contribution be credited equally, regardless of income). The reason for the higher rate is that it is charged to the new net income (less credits) rather than to the current gross wage. Note that if Survivors Insurance for non-retirees is not split out, the rate will be higher. Separation of this tax from the NBRT is necessary unless the employee contribution is to be totally eliminated with a uniform benefit. A separate payroll contribution is required as long as benefit levels are set according to income.
The fourth prong is an income surtax on wages and distribution from the sale of inherited assets (with distributions remaining tax free when they are the result of a sale to a qualified Employee Stock Ownership Plan), capital gains and dividend income above $100,000 for joint or widowed filers (half that for single and couples filing separately) – or $150,000 at current gross income levels. The rates would be cut by 24% from current rates, so that the current 28% rate would be 4% and the Clinton era 39.6% rate would be 15.6%.
We recommend even higher rate structures be put in place to account for the fact that in the short term, higher income individuals do not spend all of their money. The highest rate should be 27% to match the Net Business Receipts Tax rate and should kick in at $550,000 in income.
In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtax on that income. We considered and rejected a similar option in a plan submitted to President Bush’s Tax Reform Task Force, largely because you could not guarantee that the right people pay taxes. If only large dividend payments are reported, then diversified investment income might be under-taxed, as would employment income from individuals with high investment income. Under collection could, of course, be overcome by forcing high income individuals to disclose their income to their employers and investment sources – however this may make some inheritors unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it is preferable to leave filing responsibilities with high income individuals.
This tax would fund overseas, sea and strategic military deployments, other foreign operations, net interest on the debt and repayment of the Social Security Trust Fund, as well as any additional debt reduction, down to and including total debt repayment – which is required if the Gentleman from Texas and his followers are serious about ending the Federal Reserve and we are all serious about not burdening our children with debt.
Thank you again for the opportunity to offer comments on this topic.
It is no surprise that there is a significant fraud problem in this area. The tax code provisions which provide these credits are not easy to understand for the average tax preparer, let alone for the working poor population eligible for these credits. This drives most of those eligible toward paid preparers with no certification requirement who often charge a premium for their services and for the inevitable refund anticipation loans. Because interest on such loans is a percentage of the total refund, preparers have every incentive to stretch the truth.
While tax reform may simplify how these credits are determined, they cannot be simple enough for those who are less literate as a rule than the general population. Indeed, many are not literate at all in English, so they don’t really understand what they are signing. Unless tax forms are available in Spanish and a multitude of other languages (Korean and Eritrean are very popular in my neighborhood as well), removing these credits from personal income taxation – and indeed removing the need for most people to file at all – seems to be the only real solution. Throwing more money at the IRS enforcement budget does not get to the root of the problem at all. A four pronged system is called for.
The first prong is a Value Added Tax (VAT) of between 10% and 15%, which should be a replacement for low rate income taxation rather than being a supplement to it. In the transition, net wages could be increased by the rate of the VAT so that consumers are not unduly burdened – while still being conscious of taxation, as the tax total can appear on the receipt, as sales taxes do now. It would be all the better to have this tax fund discretionary military and civilian spending, making the pursuit of pork less attractive to Members and constituents alike.
The second prong is a VAT-like Net Business Receipts Tax. It would be on the same base as the VAT (wages and profits), but would have deductions and credits – among them the health insurance exclusion, additional credits from the Patient Protection and Affordable Care Act and an enhanced refundable Child Tax Credit.
The expanded credit would be paid by employers with wages, rather than through tax refunds and would not depend on the base wage (which would be lower with the credit factored out – although the wage cuts would be on the higher end of the scale – indeed, the minimum wage should be increased so lower wage workers are paid by more than their credits).
If the home mortgage interest and property tax deductions were not retained and the same amount transferred to this credit, along with the end of the tax exemption for children, the Child Tax Credit could be expanded to $500 per month per child. That is roughly half the cost of raising a child. States could give a credit for the other half in some areas, with some states requiring much less to cover the cost of living.
Note well that such levels would undoubtedly reduce the need for abortion and contraceptive services, so that supporting this proposal should be counted as a must-support for a perfect pro-life rating. It would also, by encouraging more children and better housing, bring back the economy in the short term and solve our entitlement crisis in the long term by ending the aging crisis.
This tax would replace mid-range income tax revenue, the Corporate Income Tax and the payroll taxes for Survivors under 60, Disability Insurance and Hospital Insurance. This tax would cover all entitlement and non-entitlement/non-OASI social spending. The rate would be 27% after exclusions and 33% with exclusions. These are the balanced budget rates. They will go lower as programs which duplicate the enhanced benefits are eliminated or turned into additional tax credits – an employer credit for both college and elementary education come to mind. Additionally, in the short term and in similar economic times, income tax revenue and borrowing could supplement this category of spending.
In the transition, this tax would lower net wages to account for the tax benefits for children, plus the loss of certain deductions by higher income individuals, as well as gross wages, which would be lowered to the net wage plus Child Tax Credits plus the OASI contribution, which would be the third prong and would be increased to 6.5% for individuals and employers (with the option that the employer contribution be credited equally, regardless of income). The reason for the higher rate is that it is charged to the new net income (less credits) rather than to the current gross wage. Note that if Survivors Insurance for non-retirees is not split out, the rate will be higher. Separation of this tax from the NBRT is necessary unless the employee contribution is to be totally eliminated with a uniform benefit. A separate payroll contribution is required as long as benefit levels are set according to income.
The fourth prong is an income surtax on wages and distribution from the sale of inherited assets (with distributions remaining tax free when they are the result of a sale to a qualified Employee Stock Ownership Plan), capital gains and dividend income above $100,000 for joint or widowed filers (half that for single and couples filing separately) – or $150,000 at current gross income levels. The rates would be cut by 24% from current rates, so that the current 28% rate would be 4% and the Clinton era 39.6% rate would be 15.6%.
We recommend even higher rate structures be put in place to account for the fact that in the short term, higher income individuals do not spend all of their money. The highest rate should be 27% to match the Net Business Receipts Tax rate and should kick in at $550,000 in income.
In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtax on that income. We considered and rejected a similar option in a plan submitted to President Bush’s Tax Reform Task Force, largely because you could not guarantee that the right people pay taxes. If only large dividend payments are reported, then diversified investment income might be under-taxed, as would employment income from individuals with high investment income. Under collection could, of course, be overcome by forcing high income individuals to disclose their income to their employers and investment sources – however this may make some inheritors unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it is preferable to leave filing responsibilities with high income individuals.
This tax would fund overseas, sea and strategic military deployments, other foreign operations, net interest on the debt and repayment of the Social Security Trust Fund, as well as any additional debt reduction, down to and including total debt repayment – which is required if the Gentleman from Texas and his followers are serious about ending the Federal Reserve and we are all serious about not burdening our children with debt.
Thank you again for the opportunity to offer comments on this topic.
posted by Michael Bindner at 12:57 AM
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