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Earned Income Tax Credit A Subsidy Rife With Fraud

By RONALD C. ELEVELD

March 22, 2013

Connecticut's Earned Income Tax Credit, established at the behest of Gov. Dannel P. Malloy two years ago, is the height of fiscal irresponsibility and ignorance and doubled down on taxpayer-financed fraud already documented at the federal level.

In 2011, a U.S. Treasury inspector general report identified the program, known as EITC, as having the "second highest dollar amount of improper payments of all Federal programs" with a fraud rate of 23 percent to 28 percent, according to the IRS. In 2011, the EITC cost nearly $62 billion, which means taxpayers coughed up at least $14 billion in just that year to pay for fraudulent subsidies.

Here, Connecticut taxpayers were forced to spend $110 million for a new subsidy, with $25 million of that likely paying for fraudulent claims. This came at the same time taxpayers faced the biggest tax increase in state history and budget deficits for as far as the eye can see. If a corporate subsidy program had that level of fraud and abuse, people would rightly be calling for its elimination.

Although called a "tax credit," the EITC is, in fact, a subsidy. It is a cash payment made to individuals who, under our already progressive tax system, pay no income taxes and therefore have no tax liability against which to apply a "credit."

This year, Malloy proposed a slight reduction in the state EITC, which caused advocates for low-income residents to protest this "tax increase." So, according to government speak: Plans to extend taxes that were set to expire and actually take money out of people's pockets is not a "tax increase"; however, reducing the amount of free money given to folks who do not pay income taxes is? Unfortunately, this politicization of the language is a sign of the level of dysfunction our government has reached.

Although the IRS has tried to reduce the level of fraud and abuse in the EITC program, such efforts were met with political and legal opposition. In 2004, when an objective statistical analysis of EITC claims in the greater Hartford area showed an unusually high number of claims, the IRS attempted to conduct an area audit. However, then-Mayor Eddie Perez, who is now appealing a conviction for bribery and extortion, sued the IRS to stop the audit. The IRS backed down rather than fight the lawsuit.

More recently, when the IRS, with the goal of reducing fraud, tried to institute standards and oversight for paid tax preparers — many of whom are unlicensed — the agency was again sued. As a result of these failed efforts, the inspector general concluded that "the risk remains high that no significant improvement will be made in reducing improper EITC payments." The fraud will continue unabated.

Taxpayer-backed economic subsidies created and directed by the political class are bad public policy — whether those subsidies benefit corporations or certain classes of individuals. They are a form of social and economic engineering used to promote a political agenda that undermines our economy and our democracy. Almost 200 years ago, Alexis de Tocqueville commented that the American democratic form of government was "the only one in which those who vote for a tax can escape the obligation to pay it." He also predicted that "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

Unfortunately, we seem to have arrived at the tipping point de Tocqueville predicted, where the majority can vote themselves benefits paid for by the minority. We no longer seem to share that common understanding that the engine for collective growth is individual economic drive and production. Instead, we focus on how to divide up the pie while the pie keeps shrinking, and no one has noticed that the bakers have left the building.

The bakers are scurrying to preferred bakeries like Florida or Texas. This shrinks the pool of bakers, and it means that those who are left get to pay more. Economics 101: Raise the price of something — taxes — and you get less of it — taxes collected.

Ronald C. Eleveld is a financial adviser in Windsor, where he is Republican town chairman.