Congress Will Send Billions To Tax Cheaters


Congress Will Send Billions To Tax Cheaters

Feb 5, 2008 3 min read

Former Distinguished Fellow

Ernest served as a Distinguished Fellow at the Heritage Foundation.

Cheaters never win? They'll win billions from the "economic stimulus" package that's rushing through Congress. Over five million people who file phony tax returns can expect to receive at least $300 each (and probably more) in checks from the U.S. Treasury.

The claimed purpose is to put money in people's hands so they'll spend it and boost the economy. Many in Washington don't seem to care which of those hands are dirty. There's another purpose, too: It's political stimulus, to buy voter support in this fall's elections. Even these millions of tax cheaters might vote to keep those in office who give them such a windfall.

The $150-billion package includes about $100-billion worth of tax "rebate" checks. By insisting that checks also be sent to those who don't pay income taxes -- but who DO report earning at least $3,000 -- liberals push money out the door toward a huge group who already defraud the government each year.

How does this work? People with low incomes (and earning up to $39,783 for a family of four) and who pay no income taxes nevertheless usually file a tax return for one reason -- to get a government assistance check for up to $4,716 under a program called the EITC -- "Earned Income Tax Credit." (For those who remember, this parallels what liberal Sen. George McGovern called a "negative income tax" when he ran for President in 1972.)

The EITC list is what the government will use to identify the non-taxpayers who will get checks under the stimulus legislation.

That list is dominated by fraud. Year after year, from one-fourth to one-third of these EITC returns are based on illegal multiple returns, phony Social Security numbers, and claims of non-existent children or even make-believe spouses.

The fraud is huge because over 22-million EITC returns are filed each year (as of 2006), and Uncle Sam sends $43.7 billion each year in direct checks to this group as an income supplement.

The General Accounting Office in 2005 verified the vast scale of the fraud, reporting that "the IRS estimated [it is] between 27 and 32 percent of EITC dollars claimed."

The math is simple: One-third of 22 million is 7.3 million cheaters who get EITC checks. If the fraud level is "only" one-fourth, then it's still 5.5 million who get the checks. The annual cost to taxpayers for EITC fraud ranges from $11 billion to $14.6 billion going directly out from the Treasury. Sending each cheater an extra "stimulus" check this year for at least $300 (or $600, $1,200 or more in some cases) is multi-billion-dollar icing on the cake for tax cheats and a poke in the eye to honest taxpayers.

That GAO report was not the only warning. For many years official Washington has known about rampant fraud in the EITC program. Lawmakers have held multiple hearings and received repeated reports from the IRS and watchdog agencies. But watchdogs are ignored because most elected officials treat EITC as a sacred cow.

EITC is America's second-largest public assistance program, exceeded only by Medicaid. And EITC was left unfixed during welfare reform. There is no time limit on how long someone can claim an EITC check, year after year after year.

But now Congress and the President are determined to appear to be doing something about the economy -- even if it's the wrong approach. Everyone likes getting a check in the mail, but everyone's take-home pay would improve, jobs would expand and the economy would be stronger if we made tax fixes permanent instead, as Heritage Foundation research confirms. That might not buy as many votes as a giveaway, however, and Congress is anxious to shore up its sagging public approval ratings.

Honest low-income earners already have their Social Security and Medicare tax payments offset through their EITC checks. So sending them more isn't a rebate. It's a handout that everyone else is forced to pay, and Uncle Sam is borrowing billions to send the checks. Worst of all, the plan re-rewards those 5- to 7-million cheaters who already rip off the EITC system.

In its haste to buy votes, Congress is taking a bad situation and making it worse. This isn't stimulating. It's depressing! At least there's a partial cure if Congress would apply common-sense and refuse to send rebate checks to people who don't pay income taxes.

Ernest Istook is a distinguished fellow in Government Relations.

First appeared in Human Events

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