One of my missions in life is fundamental tax reform. I would like to replace the corrupt internal revenue code with a simple and fair flat tax.
Though what I really want is a tax system that minimizes the damage of extracting money from the productive sector of the economy, so I’ll take any system with a low rate, no double taxation, and no distortionary loopholes.
The national sales tax, for instance, also would be a good option if we can first repeal the 16th Amendment so there’s no risk that politicians would pull a bait and switch and saddle us with both an income tax and a sales tax (and in my ultimate fantasy world, we would shrink the federal government to the size envisioned by the Founding Fathers, in which case we probably wouldn’t need any broad-based tax at all).
While I normally make the economic case for tax reform, there are many reasons to fix our broken tax code.
Many Americans, for instance, are rightfully upset that the tax code is a 76.000-page monstrosity that enables the politically well connected to benefit from special provisions.
So we don’t know if the rich are paying an appropriate amount. Some of them are paying too much because of high rates and double taxation, while some of them are paying too little because they have clever lawyers, lobbyists, and accountants.
In an ideal world, if someone like Bill Gates earns 10,000 times as much as I do, then he should pay 10,000 times as much in tax. That’s a core principle of the flat tax.
But this post isn’t about why we need tax reform to promote economic growth or fairness. Instead, I want to focus on tax reform as a way of reducing welfare fraud. The Treasury Department just released a report acknowledging that the IRS made more than $100 billion of improper “earned income credit” payments over the past decade and that about one-fourth of all such payments are in error.
This Fox News article is a good summary. Here are the key details.
The Internal Revenue Service paid out more than $110 billion in tax credits over the past decade to people who didn’t qualify for them, according to a Treasury report released Tuesday. …IRS inspector general J. Russell George said more than one-fifth of all credits paid under the program went to people who didn’t qualify. …George said in a statement. “Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year and that is disturbing.” …The agency said it prevents “nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims.” The EITC is one of the nation’s largest anti-poverty programs. In 2011, more than 27 million families received nearly $62 billion in credits.
Now some background. The “earned income credit” or “earned income tax credit” is actually an income redistribution scheme operated by the IRS. It’s basically a wage subsidy. If someone earns money (the “earned income” part), the law says the IRS should augment that money with a payment from the government (the “credit” or “tax credit” part).
The key thing to understand, though, is that the EITC is “refundable,” which is the government’s term for payments to people who don’t earn enough to owe any income tax. That’s why it’s primarily an income redistribution program. Only it’s operated by the IRS rather than the Department of Health and Human Service or some other welfare agency.
And when government is giving away other people’s money, there are those who will try to abuse the program. That’s true for corporate welfare, and it’s true for traditional welfare like food stamps. And, as we see from the Treasury report, it’s true for the EITC.
That’s the bad news.
The good news is that the EITC has a redeeming feature. Some lawmakers realized traditional welfare programs were very destructive because they paid people not to work. The EITC supposedly offsets that perverse incentive because you get the money only because you earn some income.
But now let’s share some additional bad news. The government takes away the EITC once your income reaches a certain level, and this is equivalent to a big increase in the marginal tax rate on earning additional income.
And when you combine the EITC with all the other redistribution programs operated by government, you create a huge dependency trap. Indeed, the chart shows that many of these programs can be larger than the EITC (which is called “negative income tax”).
So let’s adopt a flat tax and get rid of all the bad features of the tax system, including the EITC. Welfare and income redistribution are not proper roles of the federal government.
We’re far more likely to get good results – both for poor people and taxpayers – if we let state and local governments experiment and learn from each other on what actually helps people climb out of poverty.
P.S. I can’t overlook an opportunity to point out that today’s complicated and convoluted tax code is the reason why we have a powerful and intrusive Internal Revenue Service. And never forget that the IRS has a long record of abusive actions.
- It has thieving employees.
- It has incompetent employees.
- It has thuggish employees.
- It has brainless employees.
- It has victimizing employees.
- And it has politically biased employees.
[…] I’ve previously written about widespread fraud affecting programs such as Medicare, Medicaid, food stamps, welfare, disability, and the earned income credit. […]
[…] I’ve previously written about widespread fraud affecting programs such as Medicare, Medicaid, food stamps, welfare, disability, and the earned income credit. […]
[…] there’s also plenty of the latter form of corruption in programs such as Medicare, Medicaid, welfare, job training, food stamps, disability, […]
[…] Unsurprisingly, as is so often the case with redistribution programs, there’s rampant fraud with the EITC and other refundable tax […]
[…] but part of what she’s doing is expanding redistribution and making government bigger, which will encourage more fraud). She also has been pretty cagey about how she plans to pay for her […]
[…] Primero, como se señala en el documento de Kyle, la reducción de impuestos es «reembolsable». Esto significa que el dinero va a las personas que no pagan impuestos. En otras palabras, es un gasto del gobierno que se está lavando a través del código tributario. Así que Harris dice que recorta los impuestos, pero parte de lo que está haciendo es expandir la redistribución y hacer que el gobierno sea más grande (y alentar más fraudes). […]
[…] First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud). […]
[…] First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud). […]
[…] wages subsidies are riddled with fraud because the government effectively gives people lots of money simply for filing a tax return, yet […]
[…] not aware of the degree to which unemployment benefits are fraudulent. Hopefully it’s not as bad as the EITC, though I’m confident that problem is bigger than politicians and bureaucrats would ever […]
[…] fraud in the Medicare program. There’s fraud in the EITC program. There’s fraud in food stamps. There’s fraud in Medicaid. There’s fraud […]
[…] EITC fraud. […]
There will still need to be some sort of collection agency to make sure that nobody will cheat on their taxes.
[…] assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered […]
[…] assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered […]
[…] assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered […]
[…] assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered […]
[…] assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets […]
[…] fraud against taxpayers, routinely sending checks to crooks and con artists milking the system for EITC payments and false […]
[…] Third, the EITC is riddled with fraud. […]
[…] fraud against taxpayers, routinely sending checks to crooks and con artists milking the system for EITC payments and false […]
[…] fraud against taxpayers, routinely sending checks to crooks and con artists milking the system for EITC payments and false […]
[…] one of those goodies is the Earned Income Tax Credit, which is a form of income redistribution operated through the tax code. And Bush is proposing to expand the EITC, though there aren’t any details about this part of his […]
[…] one of those goodies is the Earned Income Tax Credit, which is a form of income redistribution operated through the tax code. And Bush is proposing to expand the EITC, though there aren’t any details about this part of […]
[…] isn’t really anything newsworthy in that story. After all, nobody should be surprised that income-redistribution programs such as the EIC attract a lot of fraud. Nobody should be surprised that an IRS bureaucrat decided to take other people’s money […]
[…] isn’t really anything newsworthy in that story. After all, nobody should be surprised that income-redistribution programs such as the EIC attract a lot of fraud. Nobody should be surprised that an IRS bureaucrat decided to take other people’s money […]
[…] the Michigan earned-income credit works the same way as the one in Washington, it’s not a tax break. It’s simply a wage subsidy, a form of redistribution that gets […]
[…] there’s also plenty of the latter form of corruption in programs such as Medicare, Medicaid, welfare, job training, food stamps, disability, […]
[…] there’s also plenty of the latter form of corruption in programs such as Medicare, Medicaid, welfare, job training, food stamps, disability, […]
[…] what wonderful ideas. More pork-barrel spending out of Washington and more income redistribution laundered through the tax code with the […]
With a national sales tax you can abolish the IRS. A flat tax will still be subject to “bait and switch.” A drive to eliminate the 16th amendment can be initiated; meanwhile, install the sales tax, elilminate the IRS, and incorporate language in the statute that recognizes the 16th amendment is no longer viable. This show the intent of Congress.
[…] such as Medicaid are fiscal catastrophes. The food stamp program is riddled with waste. The EITC is easily defrauded, even sending checks to prisoners. And housing subsidies are a recipe for the worst forms of social […]
Last year we paid a caregiver to take care of my wife- who is disabled. She (the caregiver) paid no taxes, and received an $800 refund from the government. Meanwhile, we had to pay for her social Security, and unemployment to both state and federal. And at the end, we underestimated and owed over $900 in taxes. Hmmm- sounds like redistribution to me.
[…] Mitchell, Welfare Fraud Is another Reason to Replace the IRS with a Flat Tax. More on the TIGTA EITC report we […]
another consideration… the aggravation factor of the tax system… I would like to see revision that exempted the vast majority of Americans from being harassed by their government…no forms… no yearly filings… and a national referendum every 2 years on giving politicians the right to raise taxes… let them make their case directly to the voters every election cycle… and let the voters vote up… or down tax increases… keep the ass-clowns on a short leash………….
I know.. I know… *hangs head*
Ahem…
I think we’re actually on our way to implementing a flatter tax. I mean, we just instituted an additional 16% marginal income tax (the core effect of ObamaCare subsidies) for the lower and middle class 🙂
It’s a joke? I’m not sure.
European motivation levels, European growth rates, European trajectory to decline, here we come!!!
PEOPLE, PEOPLE, the ONLY way to radically change the corruption in DC and the Internal Revenue is to PASS THE FAIR TAX AND END THE INCOME TAX AND IRS!! Ronald Reagan ESTABLISHED FLAT TAXES, George W. Bush ESTABLISHED FLAT TAXES–as soon as a different Congress and president is voted in TAXES GO BACK UP! It’s TIME TO END INCOME TAXES. Pass the Fair Tax–ABOLISH the income tax and IRS, replace both with a national sales tax of 23%–which is basically the current tax on consumer items and products, will be charged for professional services. There will be NO taxes on second-hand or used items, NO taxes on businesses or corporations-and no taxes to be passed on to consumers who purchase their items and services. It will spur investment, savings, and become an economic engine for a boom in growth. EVERYBODY who participates in this U.S. economy WILL PAY THEIR FAIR SHARE! No off-shore accounts to hide money from taxes, all those billions will come home to U.S. for investment, jobs, new businesses, business expansion, etc…
Personally, I like the idea of a consumption tax because it provides more degrees of freedom. http://coldwarwarrior.com/
[…] Welfare Fraud Is another Reason to Replace the IRS with a Flat Tax […]
[…] Dan Mitchell of the Cato Institute has noted, “Many Americans, for instance, are rightfully upset that the tax code is a 76.000-page monstrosity…” and it is true that many are upset at all the double taxation that goes on in our economy. […]
Please explain why you prefer a flat tax over a consumption-based tax? You should read the debate that Steve Forbes had with Martin Armstrong first (http://armstrongeconomics.com/research/tax-debate-steve-forbes-martin-armstrong-governor-jim-florio-of-nj-1997/)
I am not in favor of changing anything in the tax system. My reason, I don’t have to tell you that the first chance the pigs in DC get they will bring back the graduated tax and we will have both. Remember the cuts we got under Reagan, we got tax brakes WOW and we gave up tax breaks that we had like interest on credit cards, and first chance they got the pigs raised the tax rate but didn’t put back the deductions we once had. NO WAY. As a Jersey resident I saw Brendan Burn do it to us, so I know what the plan is, NO WAY.
A flat tax will only work if there is no way in hell of raising the flat tax rate…..the government will actually have to learn to live within the means set. OR…”given a few years the big spenders in Washington will think they have an open door to snow unlimited source of money. What will start out at 10 or 15 percent will end up at 40 percent in no time flat
Dear Dan,
I have a growing interest in environment conservation, maybe due to the fact that my country used to sell the very valuable “Uruguay natural” brand (good meat, fine beaches, etc), which is now being completely destroyed by politicians in need of money that are bringing open cast mining and other industries to very productive uruguayan land and beautiful beaches.
Obviously, the Uruguayan Government is perfectly incapable of monitoring the environmental effects of those industries, it has even proved itself incapable of monitoring tap water safety.
What, if any, do you think should be the role of government in environment protection? In case you consider it should not exist, in which way could markets take care of this? I remember you once writing on some interesting points of view regarding national parks.
Gracias y muchos saludos! Ins
Reblogged this on U.S. Constitutional Free Press.