$106 Billion Of Improper Refundable Tax Credit Payments!!!

That’s a lot of money even in Washington. At 10:30 a.m. tomorrow, the House Ways and Means Oversight Subcommittee will hear from IRS, Treasury, and GAO witnesses. It will be webcast live here.

The Earned Income Tax Credit, which I formulated in 1975, is the perennial leader of improper tax payments, running $16.9 billion in FY10 according to this GAO report. That’s out of $56.2 billion of total cost for the EITC as estimated by the Joint Committee on Taxation here. Some of that $16.9 billion is fraud, and some isn’t. The EITC is complicated, and many poor people walk into the offices of tax preparers early every year to claim it without understanding all the ins and outs of the law. The preparers do the best they can with inadequate documentation, but still, a 30% error rate is not good. The basic purpose of the EITC, to reward the poor for work by offsetting a large portion of their payroll tax payments, is a good one first proposed by Milton Friedman and pushed into law by Presidents Nixon and Ford. When the poor work, they draw less in benefit payments. That same GAO report shows much more is lost in improper Medicare and Medicaid payments.

The First-Time Homebuyer Tax Credit is another example. On April 15, 2011, the Treasury IG published this notice of $513 million of fraudulent claims, including some form 128 IRS employees! On February, 2009, the Joint Committee on Taxation estimated this credit would cost about $4.2 billion over five years, so $513 million is a lot of fraud. The lesson here is that congressional pressure to sell more homes and to create more jobs can waste a lot of money. The other lesson is that Congress often imposes impossible administrative burdens on the IRS to determine if people qualify for such tax credits.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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