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Tax Prep Companies Complicate Tax Code to Mooch Aid Intended to Fight Poverty

Here’s a bill Senators Thune and Rounds should work to change. Senate Appropriations has moved a funding bill that quadruples the length of the form that taxpayers fill out to get the Earned Income Tax Credit. They didn’t do it because Rand Paul told them that the EITC has a 25% fraud rate (it’s got error, but not that much proven deception); they did it because tax-prep companies lobbied for the change.

First, understand that the EITC does a lot of good:

The EITC is one of America’s premier anti-poverty programs. It targets poor families specifically, and because you have to work to get it, countless studies have found it encourages single mothers and other people without much connection to the labor market to enter the workforce. The Census Bureau estimates that it and the related Child Tax Credit keep 9.4 million people out of poverty every year, and recent research suggests that when you take into account the people the EITC brings into the workforce, the real number is probably twice that. If that weren’t enough, it also boosts test scores for kids in families receiving it and improves both parents’ and children’s health [Dylan Matthews, “H&R Block Snuck Language into a Senate Bill to Make Taxes More Confusing for Poor People,” Vox, 2015.08.24].

The EITC delivers these benefits with 1% administrative costs, far less than non-tax benefit programs. If you want bang for the buck in fighting poverty, you promote the EITC.

Alas, professional tax preparers charge low-income folks a lot of money to prepare 1040s with the EITC. When a low-income family stands to receive three or four thousand dollars, it’s easy to fold in a three or four hundred dollar service fee that the tax preparer slices out of the refund check before it reaches family. The family never feels the pain of that money coming out of their pockets, but a chunk of the money that could have produced the anti-poverty benefits listed above is lost to the friction of corporate profit. (Again, it’s not enough that big business gets lots of its own handouts straight from the government; they want a bite of what’s on the little guy’s plate, too.)

Most EITC error happens because of the complexity of the rules. Adding paperwork means more error. And commercial preparers are responsible for more of that error:

There is no good policy rationale for this change. H&R Block CEO William C. Booth has attempted to justify it as a way to reduce improper payments, but there’s little reason to think it would have that effect. Again, taxpayers already have to supply all this information, and the real misreporting problem is from paid preparers like H&R Block, not individuals. A recent IRS study found EITC-claiming returns from paid preparers were more likely to result in overpayments than self-filed returns. That’s right: People who fill out taxes for a living are, on average, worse at it than taxpayers who do it themselves (and, by the way, the IRS’s volunteers do a better job than anybody).

The only possible reason to change the form, then, is to confuse taxpayers enough that even more of them will pay companies like H&R Block to prepare their returns [Matthews, 2015.08.24].

The Earned Income Tax Credit helped 67,000 South Dakota households in 2012 and pumped $139 million dollars into our state economy. Senator Thune! Senator Rounds! Let’s keep that help going to the people who need it most! Instead of letting tax prep corporations profit off the poor, try fully funding the IRS, giving the IRS the authority to straighten out the commercial preparers, and adopt simplifications to the EITC that the Bush Administration proposed a decade ago.

23 Comments

  1. mike from iowa 2015-08-28

    Wingnuts have expressed a desire to do away the EITC. They claim poor folks get back monies they never paid to begin with and with korporate amerika already filling that gap,they sure don’t want any competition for free monies.

    Wingnuts have also cut the IRS budget and then whine when the revenuers can’t do their jobs because they had to lay off workers.

  2. Don Coyote 2015-08-28

    FWIW: The original EITC is a Republican idea. It was proposed by President Ford in 1975 partially as a response to the negative income tax proposal by that “evil” capitalist economist Milton Friedman and partially as a response to the rising payroll taxes enacted to stabilize the Social Security system. And don’t forget that in the 80’s both President Reagan and Bush supported increases in the size of the program. However under Bill Clinton, a modest work incentive program/poverty amelioration program exploded into a full blown welfare Frankenstein with direct spending more than doubling from $10B to $26B.

    While it’s easy to characterize money grubbing corporations/accountants as skimming money off of the backs of the poor, in most cases this is due to the complexity of the Federal tax code requiring that taxpayer to file a more complex 1040 or 1040A return instead of the the simpler 1040EZ and not the complexity of the EITC schedule in itself. If you sincerely want to save the billions of dollars spent to insure compliance with the Federal tax code then simply simplify it by adopting a flat tax system and stop targeting tax cuts/benefits using the tax code which is the cause the complexity.

    Also cah, you are double counting the money being injected into the economy with the EITC by failing to account for tax dollars taken from the taxpayers not qualifying for the EITC.

  3. mike from iowa 2015-08-28

    Clinton had an extremely hostile congress run by wingnuts for 6 of his 8 years in office.

  4. mike from iowa 2015-08-28

    The earned income tax credit (EITC) was originally enacted in 1975, and over the years it has grown to be one of the principal antipoverty programs in the federal budget. The credit underwent significant expansions in 1990 and 1993. In 2003, some 19 million taxpayers were expected to claim more than $34 billion of earned income credits, with an average credit per taxpayer of $1,784 per year (U.S. Congress 2004). In 2004, some families will be entitled to claim an earned income credit of up to $4,300 per year (IRS 2003).

    Seok tax policy center

  5. mike from iowa 2015-08-28

    Seok was supposed to be From.

  6. caheidelberger Post author | 2015-08-28

    That’s worth a lot, Don. It’s a good Republican idea, just like the Affordable Care Act.

    There’s no double-counting. Those dollars would be taken in taxes no matter what. And if we’re moving dollars from wealthier taxpayers to lower-income folks, we’re getting more stimulus, since lower-income folks will spend almost every penny of those dollars, more so than the wealthy folks. And we’re alleviating poverty, which is good for those facing poverty directly but also a public good for everyone not served by letting your hoard your wealth in your silk stockings.

  7. mike from iowa 2015-08-28

    However, in recent years, the EITC has often come under political attack. It is criticized (sometimes implicitly but often explicitly) because it eliminates the income tax liability of many low-income workers, thus, it is claimed, giving them no “skin in the game” in support of the common good.1 Others criticize it for redistributing income to “people who have never paid a dime in their lives” but nevertheless “get a check from the government” (Sandmeyer 2013).

  8. Deb Geelsdottir 2015-08-28

    When I use the word “shame”, I do not do so lightly. Shame is a powerful word that ought to be used carefully. Too often shame is used as a tool or weapon against those who don’t deserve it. Abuse victims often feel very undeserved shame, as do people with mental illnesses, cognitive deficits, and similar issues.

    When people with more than enough try to take from those who have little, that’s generally not something to be proud of. When they do it simply to enrich themselves, that is shameful.

    What H&R Block and other tax companies are attempting with this bill is shameful. Thune, Rounds, and any other legislator who supports this bill is equally shameful.

  9. Richard Schriever 2015-08-28

    My direct personal experience with H and R Block and their ability to correctly fill out tax forms for those eligible for EITC (me) is that the last two years they have left $$$ on the table for me that the IRS reviewers have found. Tell me why I should ever pay H and R Block again???

  10. Richard Schriever 2015-08-28

    Coyote – EITC is NOT tax $$ that was never collected. It is RETURN/refund of withheld $$$ to the filer. At least that’s the way it has worked for ME personally. I’ve simply gotten a slightly larger refund than I would have in a few lean years due to EITC.

  11. leslie 2015-08-29

    Are these 67,000 south dakotans the same folks deprived of health care because daugaard/jackley SDGOP refuse to expand medicaid for political, nefarious reasons?

  12. caheidelberger Post author | 2015-08-29

    Richard, EITC can exceed the amount withheld. It does transfer wealth… intelligently and effectively.

  13. mike from iowa 2015-08-29

    I received the child tax credit(CTC) one year because my youngest son was living with me. I was in line for a $2100 refund, What I didn’t know at that time was the refund ended my string of consecutive quarters worked for SS disability requirements and I had to start all over. You have to work four consecutive quarters and pay the requisite taxes to be eligible to apply for disability.

  14. Don Coyote 2015-08-29

    @cah: Unfortunately the claim that Obamacare is equivalent to Romneycare is a Democrat canard to shift blame for their piece of crap program that no Republican voted for. And just as a modest idea for universal access to health insurance was turned into hash by the the Democrats, so too was the idea of a negative income tax. As conceived by Milton Friedman, the NIT would’ve replace the whole raft of federal welfare programs. However, as is all too typical of centralized planning, once a reasonable idea is placed into the hopper an indistinguishable hash come out the other end.

    It doesn’t matter that the taxes would have been collected regardless, it still has the effect of removing wealth from the economy that can’t be spent/used by the private sector. Nor does it matter that it’s borrowed as that borrowed dollar has to come from wealth that’s already been created. Moving wealth from one pocket to another does nothing for stimulating the economy since you are robbing Peter to pay Paul.

    University of Chicago (go Maroons) economist John Cochrane states it quite succinctly:

    “First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

    Second, investment is “spending” every bit as much as is consumption. Keynesian fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather than save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.”

    Even Keynesian economics realizes that taxation and borrowing money to pay for stimulus is counter productive. What Keynes recommended was printing money to inject “new money” into an economy.

    And even if you accept the Keynes idea of stimulus, any spending of the stimulus money on debt (credit cards, car payments, house payments, school loans, pay day loans, etc) is not stimulative since it is only paying off spending that occurred in the past vastly reducing the effect of the stimulus.

  15. larry kurtz 2015-08-29

    eat the rich.

  16. larry kurtz 2015-08-29

    The hypocrisy of South Dakota’s Republican Party knows no bound.

    South Dakota should listen to Paula Hawks, Bernie Hunhoff and Cory Heidelberger and pass a corporate income tax.

    Reduce the number of South Dakota counties to 25, turn DSU into a community college, and adopt my cannabis template: the kurtz solution painted on a thumbnail.

    A well-respected, less radical former Republican legislator, Stan Adelstein, was driven from the extremist South Dakota legislature for proposing the bill Schoenbeck is being lauded for.

    A state that calls itself conservative depends on federal Social Security benefits to pay the property taxes that currently pay the bulk of South Dakota’s moocher state bills while video lootery drives poor residents even further into despair.

    South Dakota deserves the legislature it suffers.

  17. Lynn 2015-08-29

    It will be interesting to see what happens when President Joe Biden is in office.

  18. grudznick 2015-08-29

    Lar, I only agree with you about halfway. As I said at Talley’s this morning, we need to reduce the counties to 25 and turn DSU into a community college. But we also need to turn BH into a prison.

  19. bearcreekbat 2015-08-29

    I disagree with Don Coyote’s economic analysis, especially his argument that “It doesn’t matter that the taxes would have been collected regardless, it still has the effect of removing wealth from the economy that can’t be spent/used by the private sector.”

    I think Don overlooks the fact that when government removes wealth from someone in the “private sector” – such as through the EITC – the government is in fact putting this wealth right back into the private sector. The key difference is that by transferring wealth from the “private” wealthy individual to the “private” poor individual, the government assures that these funds will be spent and will stimulate the economy as well as provide food and shelter for the poor. In effect the poor merely are conduits for the transfer of funds right back to the wealthy, such as Walmart owners – through the profits Walmart makes by selling groceries and the staples of life to the poor.

  20. caheidelberger Post author | 2015-08-31

    (Prison at BH? No way: put it at Mines instead. Or at the old military installation at Igloo.)

    And Don, “piece of crap program”? Chortle chortle. You’re only saying that because it’s working, surviving every challenge, and leaving Republicans saying, “Oh, crap, it works, people like it, and we can’t win elections running against it.” Just like Social Security and Medicare, you’re stuck with ACA.

    On wealth transfer, see BCB above. He gets it.

  21. leslie 2015-09-01

    NO COYOTE “money…it has to come from somewhere.” $76 billion in todays gold prices is what Homestake took for free. the initial mineral claims cost nothing under 1872 mining law, except in dead Lakota.

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