Tax foundation says IRS mandate should shrink
24 March 2014
Posted by: Author: Mike Godfrey
Author: Mike Godfrey (Tax-News)
In a recent paper, the Tax Foundation has recommended that, as the primary function of the Internal Revenue Service should be to collect tax revenue, it would be best to move the functions of refundable tax credits outside the tax code to spending programs.
In the 2011 fiscal year, the IRS paid out USD99.1bn in refundable tax credits, down from a peak of over USD120bn in 2009. The largest refundable credits are the Earned Income Tax Credit (EITC), at USD65bn annually, and the Additional Child Tax Credit, at USD30bn per year. In comparison, the Federal Government spends more on refundable tax credits than it spends to fund the Department of Education (USD71.2bn).
In the coming years, the total amount of refundable tax credits is projected to double due to the new form of transfer payment through the IRS (subsidies for its insurance exchanges) in the Affordable Care Act (ACA) of 2010, to about USD100bn annually by 2017. In that case, total tax expenditures associated with refundable credits are projected to surpass USD200bn annually.
The TF pointed out that "refundable tax credits represent a form of mission creep, in which the IRS dispenses revenue instead of collecting it. Recent acts of Congress, particularly the American Recovery and Reinvestment Act of 2009 and the ACA, have dramatically increased the scope and breadth of these credits."
"Refundable credits add complexity to the tax code and favor certain kinds of economic activity over others," it said. Adding that "the phase-out of refundable tax credits as taxpayer income increases creates high implicit marginal tax rates, and, in some cases, can create infinite marginal tax rates."
Furthermore, it has been seen that overpayments for refundable tax credits are a problem for the IRS (with an overpayment rate of 25 percent being estimated for the EITC) which are generally higher than for subsidies operated through spending programs, primarily because the tax agency cannot verify that applicants meet all eligibility requirements before benefits are paid.
Given the complexity of the transfer payments in the ACA, and the fact that they are paid in advance, it is considered that overpayments will continue to be an issue in the future, and therefore, given all of the other arguments against refundable credits, the TF concluded that it "would be best to move the functions of refundable tax credits outside the tax code [and the IRS] to spending programs."
This article first appeared on tax-news.com.