When Americans think of U.S. government welfare programs they generally think of programs such as Temporary Assistance to Needy Families (TANF), Supplemental Security Income (SSI), or the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.
Other welfare programs include Head Start; the National School Lunch Program (NSLP); Medicaid; Women, Infants, and Children (WIC); energy assistance; housing assistance; and the State Children’s Health Insurance Program (SCHIP).
Most Americans would not consider programs such as Medicare, Social Security, and Federal-State Unemployment Insurance as welfare programs (even though they are), since they are technically funded in part by payroll taxes paid by employers and employees.
It is even rarer that anyone would consider a tax credit to be welfare. But unfortunately, that’s just what some of them are.
Regular tax credits are not welfare. A tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Current tax credits include the credit for child and dependent care expenses, education credits, the foreign tax credit, the retirement savings contributions credit, the child tax credit, the plug-in electric vehicle credit, and residential energy credits. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken.
Tax credits that are refundable, however, are welfare even though they are rarely viewed as such. A refundable tax credit is treated as a payment from the taxpayer, such as federal income tax withheld. Refundable tax credits include the adoption credit, the additional child tax credit, the American opportunity credit, and the earned income credit. If the tax credit “payment” is more than the tax owed, the taxpayer receives a refund of money he never paid in. Refundable tax credits are the ultimate form of welfare because they are payments made in cash instead of payments made to third parties, as in Medicaid, or an amount deposited on an Electronic Benefit Card (EBC), as in the food-stamp program. And no income received is counted as income when determining eligibility for federally funded welfare programs such as TANF, SSI, or SNAP.
The adoption credit can be as high as $13,360 for adopting a child. The full credit can be taken with a modified adjusted gross income of up to $185,210. A full phase-out occurs when that number exceeds $225,210. And according to the IRS, “You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.”
The additional child tax credit is available to taxpayers with a qualifying child who receive less than the full amount of the $1,000 per child tax credit because the tax owed is less than the allowable child tax credit. In that case the amount of the additional child tax credit is the smaller of the remaining child tax credit and 15 percent of the taxpayer’s taxable earned income. The income phase-out amount begins, like the child tax credit, at $75,000 ($110,000 if married filing jointly).
The American opportunity credit is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student. No credit can be claimed if the taxpayer’s modified adjusted gross income reaches $90,000 ($180,000 for married filing jointly). Forty percent of the American opportunity credit is refundable. That means that an amount up to $1,000 per student can be refunded over and above what the taxpayer paid in.
The crown jewel of refundable tax credits is the earned income tax credit (EITC) or earned income credit (EIC). With a maximum benefit for 2011 of $5,751, the EIC is truly welfare for the masses. According to the IRS, “Last year, over 26.8 million received almost $59.5 billion in EITC for 2010 tax year returns.” Many states and some cities and counties also offer their residents an earned income credit.
Like many federal programs that eventually grew exponentially beyond what they were ever intended, the EIC has modest beginnings. A seemingly innocent provision of the Tax Reduction Act of 1975 was a refundable tax credit for low-income taxpayers with children that provided them with up to $400. The credit was soon extended for 1976, 1977, and 1978. By 1978, the maximum a family could receive went up 25 percent to $500, with a partial credit given on incomes between $5,000 and $10,000. Beginning in 1979, the EIC was made a permanent fixture on IRS tax forms. By 1990, the maximum credit was up to $953, with a partial benefit available for incomes up to $20,264. In 1990, George H.W. Bush signed legislation greatly expanding the EIC system for the next three years. Not only did benefits go up, more dollars were awarded if the taxpayer had two or more children instead of one. Also new was an additional credit up to $357 if a child was less than one year old. By 1993, the maximum credit was up to $1,511.
Although the EIC was introduced under Gerald Ford, and increased under Jimmy Carter, Ronald Reagan, and George H.W. Bush, it skyrocketed under Bill Clinton. The Omnibus Reconciliation Act of 1993 increased the maximum EIC payment in 1994 by more than $1,000 to a whopping $2,528. Also new in 1994 was an EIC payment for a single person with no dependents. Beginning in 1979, some employees with at least one child began receiving advance EIC payments in their paychecks, claiming the rest of the credit when filing their tax return. The Education Jobs and Medicaid Assistance Act of 2010 repealed the advance EIC payments after 2010. Beginning in 2009, EIC payments were increased for taxpayers with three or more children. That increase has been extended to 2012, when the maximum benefit is scheduled to rise to $5,891, with a partial benefit available for taxpayers with incomes up to $45,060 ($50,270 married filing jointly).
The EIC program is said to discourage welfare and to be a tax break for hard-working people. Ronald Reagan once heralded it as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” According to the IRS,
EITC, the Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.
But how can a program that is itself welfare be said to discourage welfare? How can the EIC be called a “tax break,” when most of those who receive it owe no taxes in the first place? How can the EIC be called a tax refund when it is other people’s money that is refunded? Why do “low to moderate working individuals and families” need a tax credit, when they pay no taxes in the first place? (According to IRS figures, the top 50 percent of taxpayers, in terms of adjusted gross income, pay 97.75 percent of all income taxes.) If Social Security taxes are a “burden,” then why not reduce the Social Security tax rate or eliminate the tax altogether? And since when is it the job of government to create jobs and provide people with an “incentive to work”?
The EIC program has always received wide bipartisan support in Congress. And not only did it go up every year that the Republicans controlled the Congress under Clinton, it likewise increased when the Republicans had an absolute majority in Congress and the White House for more than four years under George W. Bush. The EIC is a sacrosanct plank of the Democratic/Republican welfare state, just as Social Security and Medicare are.
The EIC should not be reformed or reduced; it should be eliminated, or at least its refundability should be eliminated. It should be eliminated, not because the program is too expensive or rife with fraud, but because it is an income-transfer program masquerading as a tax credit.