Welfare By Another Name

From IBD:
Posted 4/12/2006

Entitlements: Cash welfare caseloads declined dramatically in the years immediately after welfare reform and have continued to hold at about half their pre-reform levels, despite the 2001 recession. That's the good news.

The bad news is that the welfare state, like mercury, never really goes away; it just changes form.
Welfare benefits, once the domain of the Health and Human Services Department, are now imbedded in the tax code as an IRS giveaway called the EITC, or earned income tax credit. More than 20 million will claim it this tax season.

At the same time Washington limited the number of low-income Americans eligible for cash assistance, it greatly expanded the number who could qualify for the refundable "credit," which was originally intended to subsidize low-income working families.

As a result, more Americans now participate in the EITC than any other social welfare program. The program is ripe for abuse and wildly out of control.

Here's what the politicians don't tell you as they pat themselves on the back for supposedly reforming the welfare system:

Twenty-six percent of the population receives benefits from EITC. That compares with 18% from Medicaid, 8% from food stamps, 5% from HUD, 3% from Supplemental Security Income and 2% from Temporary Assistance for Needy Families (formerly Aid to Families with Dependent Children, or cash).

The EITC provides recipients up to $4,300 a year in cash. This costs taxpayers who don't participate in it $35 billion annually.

The program is among the federal government's fastest growing. It has surged 170% since former President Clinton first expanded it in 1993.

It's also one of the most abused and defrauded programs. As much as 30% — or well over $10 billion — in EITC benefits are wrongly claimed each year.

A large share of immigrants take advantage of EITC. The refund is also based on family size. Even illegal aliens sometimes receive it. The IRS makes it easier for those who speak Spanish by providing EITC information in that language through brochures and toll-free recordings under the heading: "Credito por Ingreso del Trabajo."

Claimants get advance payments against future EITC refunds. They are also encouraged by the IRS to apply for food stamps and other welfare.

Unlike most federal credits, the EITC is refundable — that is, if the amount of the credit exceeds what's owed, the taxpayer will receive a direct payment from the U.S. Treasury for the difference. Tax preparers call it "free federal money."

In many cases, folks who haven't paid any income tax get refund checks, making the EITC a pure government handout — welfare by another name. And huge loopholes in the program have made it a boon for tax cheats and rip-off artists.

The way the tax code is written, the EITC program fails to effectively target the intended low-income working families. For instance, a part-time lawyer who works 100 hours a year at $100 an hour can get the same benefits as a fry cook who works 2,000 hours a year at $5 an hour, notes the Joint Economic Committee.

Even a wealthy Beverly Hills divorcee who gets hundreds of thousands in alimony, yet earns less than $10,000 in income, can qualify, while a family of four with an income just above $30,000 will pay the taxes that ultimately pay the divorcee's benefits. And these are examples of people who receive the benefits legally.

It's plain the program needs to be reined in. Unfortunately, it has widespread support in Washington. Annual EITC outlays have soared even under President Bush.

He and Republicans on the Hill talk a lot about reforming the tax code. They can start with the EITC — specifically by repealing the Clinton expansion of the program that allowed taxpayers with no qualifying children to receive the credit for the first time. That resulted in a large and growing number of people who did not fit the traditional EITC profile to get benefits.

With a booming jobs market providing cover against the welfare statists and their friends in the media, Republicans really have no excuse not to slow the growth of the EITC program right now.