Mises Daily Articles
The Republican Welfare State (Yet Again)
The Republicans are expanding the welfare state almost as much as they are increasing the warfare state.
In a recent report from the Centers for Medicare and Medicaid Services, chief actuary Richard Foster predicts that the federal government will soon be paying for half the cost of all health care in the United States. A major contributing factor: the Bush administration's new Medicare drug benefit, now estimated to cost almost double its initial $400 billion price tag. And that is just for its first ten years. By 2015, the annual cost is expected to be $100 billion.
But since it is tax time once again, the focus of this article is not on the Republican-sponsored slide toward socialized medicine, it is instead on Republican tax welfare. It is the Republican-controlled Congress that writes the tax laws; specifically, the House Ways and Means Committee.
The Rockwell Rule
When it comes to taxes, the Rockwell rule is the right approach: Does it reduce or eliminate an existing tax? That is the issue. Changing to a flat tax, a national sales tax, a value added tax, a consumed income tax, or, as was recently proposed in Chronicles magazine by David Hartman, the chairman of the board of directors of The Rockford Institute, a business transfer tax, is useless if it doesn't reduce or eliminate the taxes that feed the federal leviathan's multi-trillion dollar spending orgy.
There is a new deduction for tax year 2004 that meets the Rockwell test. Residents of states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) will now be able to deduct state and local general sales taxes. Unfortunately, however, this is only available to those who itemize their deductions.
Before continuing, there are some things to note about tax deductions.
On the front of the 1040 tax form, there are a number of possible deductions from one's total income that can be made before figuring the amount of tax due. Any expense that the government allows to be deducted from total income is a good thing. We can only hope and pray that more will be allowed.
Then, on the back side of the 1040 form, once the adjusted gross income has been determined, the standard deduction (or itemized deductions for some) and number of exemptions further lower the amount of taxable income. The higher the standard deduction (or the more itemized deductions that are allowed) and the higher the amount that one is allowed to deduct for each exemption the better because they lower the amount of income that one is taxed on.
The amount of tax due can then be lowered by tax credits, of which there are two types.
Nonrefundable tax credits lower the amount of taxes that are due. If no taxes are due because the combination of deductions and exemptions sufficiently lowers one's taxable income, then these tax credits obviously aren't available or necessary.
Refundable tax credits not only lower the amount of tax due, they refund the unused portion of the credit; that is, some people get money back from the government over and above what they paid in taxes to the government. And where does this money come from? It comes from the taxpayers who actually pay taxes. Refundable tax credits are therefore an income transfer program like food stamps, AFDC, SSI, and WIC. In fact, the same people who receive benefits from these programs usually also receive refundable tax credits. This is because welfare payments received do not count as income for tax purposes.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) has been around since 1975. I have previously showed that the Republicans in Congress have increased this income redistribution program every year since they took control of the Congress ten years ago. As is says on page 41 of the instructions for the 2004 1040 form: "The credit may give you a refund even if you do not owe any tax."
As expected for tax year 2004, the Republicans in Congress have raised the maximum income that one can make and still receive this credit, from $34,692 to $35,458. They have also raised the maximum amount of the credit that one can receive, from $4,204 to $4,300.
The Additional Child Tax Credit
The Child Tax Credit (CTC) is a nonrefundable tax credit that lowers one's tax liability. It was introduced as part of the Taxpayer Relief Act of 1997 (PL 105-34). Originally worth up to $400 for tax year 1998, it is now worth up to $1,000 for each child under age 17 that is claimed as a dependent. The CTC, as all tax credits, is a good thing. But beginning in 2001, the refundable Additional Child Tax Credit was instituted.
Tax law changes in 2001 included two major changes to the CTC. First, the amount of the credit doubled, in stages, from $500 per child in tax year 2000 to $1,000 per child by tax year 2010. This was modified in 2003 (the Jobs and Growth Tax Relief Reconciliation Act [JGTRRA]) when Congress accelerated the timing of the CTC benefit increase, raising it to $1,000 per child for tax years 2003 and 2004. Second, the credit was made partially refundable.
So like the Earned Income Credit, the Additional Child Tax Credit is located on the back side of the 1040 tax form under the "Payments" section. The amount of the Additional Child Tax Credit is added to the amount of federal income tax withheld as if it were also paid in to the government.
But to no one's surprise, the Republicans in Congress have expanded the Additional Child Tax Credit for 2004. Under the heading "What's New for 2004," found on page 11 of the instructions for the 2004 1040 form, we read that "the credit limit based on earned income is increased to 15% of your earned income that exceeds $10,750." This is quite an increase considering that the rate had previously been 10%.
Increasing Welfare as We Know It
Since the celebrated "Republican Revolution" in 1994, the Republicans in Congress have not rolled back the welfare state one inch. And not only do they not intend on doing so, they are expanding the welfare state almost as much as they are increasing the warfare state. The talk radio mouthpieces for the Republican Party who make their living railing against the left, the liberals, and the Democrats, need to look in the mirror.
Here is a typical example of "increasing welfare as we know it"—thanks to Republican tax welfare. In the document, Facts About the Child Tax Credit: Tax Time Can Pay Even More For Working Families, published by The Center on Budget and Policy Priorities, the example is given of a typical couple, Sam and Barbara:
Sam and Barbara are married and raising four children under age 17. They earned $25,000 in 2004 and owe no income tax. Their maximum CTC is $4,000 (4 children x $1,000). Fifteen percent (15%) of their earnings over $10,750 is $2,138 ($25,000 – $10,750 = $14,250; 15 percent of $14,250 is $2,138). Since the couple has no income tax liability, none of their CTC is used—the full $4,000 remains. Since this is more than 15 percent of their earnings above $10,750, Sam and Barbara receive a CTC refund of $2,138. They also qualify for an EIC of $2,209, bringing their total refund to $4,347!
This means that Sam and Barbara's real income is in fact $29,347. But it is actually higher than that if they receive any federal, state, or local benefits like Medicaid, SSI, WIC, food stamps, subsidized housing, or emergency heating assistance. And none of these things count as income in determining eligibility for the CTC or the EITC. And neither do amounts received from the CTC or the EITC count as income in determining eligibility for any of the abovementioned types of welfare.
Ending Welfare as We Know It
There have been proposals to integrate both of these refundable tax credits by places like The Brookings Institution. In a "Policy Brief," Tax Reform for Families: An Earned Income Child Credit (July 2003), the authors argue that "the time is ripe for an integrated credit that combines the Earned Income Tax Credit (EITC) and the CTC into an Earned Income Child Credit (EICC)."
But rather than integrating both of these refundable tax credits, they should both be abolished. The "poor" already don't pay any taxes (a family with three children that makes the medium U.S. income of $43,318 pays no federal income tax and receives a refund of $996). This means that the Earned Income Tax Credit and the Additional Child Tax Credit are pure income transfer programs. They appear to be respectable since their recipients receive an income tax refund check in the mail instead of a welfare check. But an income transfer program is an income transfer program whether it is called welfare, vouchers, entitlements, or a refundable tax credit. Until these income transfer programs are recognized for what they are, they will continue to grow unabated.
The Real Issue
Compounding the identification problem is the fact that the members of Congress who come up with these programs, as well as many citizens who benefit from them, have no problem with taking or spending other people's money. A lesson in the basic principles of economics is not what is needed here. The real issue is that the transferring and receiving of the wealth of others is a moral one, and must be approached from the perspective of religion or philosophy, not economics.