Negative income tax versus the EITC (US)

[cards]

Back in the 70's, economists and some politicians looked at an anti-poverty program labeled the "negative income tax", basically a way to distribute welfare directly to the poor without needing a host of federal agencies and all that entails. It would use the IRS to distribute funds to households that fell beneath an income level that meant that household was impoverished. For a variety of reasons, it never came off.

Today in the Wall Street Journal in the Politics and Policy column, an article about the Earned Income Tax Credit program implies that the EITC does just that. To quote "Under the EITC, the IRS mails tax-refund checks to the working poor, even those who don't earn enough to pay any income tax." I thought the EITC just made sure that the working poor weren't put into poverty by paying income taxes.

Is this true? Do we have a quasi-negative income tax? If so, why couldn't we expand it to cover the non-working poor and eliminate agencies that administer welfare benefits, everything from food stamps to welfare administration?

[citybadger]

The IRS is not equipped to administer modern welfare reform programs.


Yearly income tax super-refunds would be a poor way of distributing benefits. Not an impossible hurdle, but issuing monthly checks and filing monthly negative-income tax forms isn't quite the IRS way of doing things today.

[desdinova]

Originally posted by cards
Is this true? Do we have a quasi-negative income tax?

Yup. A "tax credit" means "we'll deduct x dollars from your income tax liability." As best as I know, this means if your liability is zero dollars and you qualify for the EITC, your liability is negative x dollars, which means you get a nice tidy refund. IANAAccountant, or other person who is professionally familiar with the tax code, however.

If so, why couldn't we expand it to cover the non-working poor and eliminate agencies that administer welfare benefits, everything from food stamps to welfare administration?

Probably because refunds are issued annually. Transfering all of the various current social benefits, in currency form, to a person once a year rather than bi-weekly or monthly or whatever is probably not a wise decision.

[TaxGuy]

On the two points in the immediately preceding post:

(1) As a person who is professionally familiar with the tax code, you got it right. The reason for this (i.e., tax jargon ahead) is that the EITC is a "refundable" credit, meaning that a taxpayer can get the credit even if the amount of the credit is higher than the amount of their tax liability.

(2) The IRS already pays the EITC to folks on a more-than-yearly basis (I think it may be quarterly, I'm not sure), so it really is effectively a negative income tax.

Also, I don't see why you'd want the government to replace food stamps and medical benefits with cash. Poor folks could spend cash on booze and drugs instead of food and medical care.

[cards]

Originally posted by TaxGuy
Also, I don't see why you'd want the government to replace food stamps and medical benefits with cash. Poor folks could spend cash on booze and drugs instead of food and medical care.

If I recall the arguments in favor of a negative income tax (this was grad school 20 years ago, so bear with me if I'm all wet), it broke down into two big categories:

1. Personal integrity/feedom - yes, some people would misuse the money, but there are people who would misuse the benefits anyway in their current form, whether they are food stamps or cash payments. By not having people trek through a bureaucracy, their self esteem is better, no humliation and they can use the money according to their self interest.

2. Government efficiency - since the payments are strictly on a needs test based on income and payments are direct to the beneficiary, the size of the government could be reduced (no foodstamp admin in the FDA, etc.). You would need to revamp some of the IRS and have a form of checks and balances against fraud, but on the whole you get a smaller more efficient government.

Of course, as the replys to the OP point out, there are valid arguments against such a scheme.