The excellent blog of the Curious Capitalist earned this comment from a reader called Dumdedumdum: Never bring a blog post to a gunfight I like that. Of course it will have to be about taxes. Here is what bothers me about the earned income tax credit.
I thought, until I came to America, that the French tax system was the most ridiculous in the world. I changed my mind: the American tax system is to say the least, the most bizarre. So I had to register to one of these free tax courses to become a tax preparer in order to understand what is going on.Disclosure: I am a democrat, what I want to show is that the best intentions do not always suffice.
Take the celebrated earned income tax credit (EITC). The generous idea to encourage people with low salaries and to help them is fine with me. But in Savannah, most people who benefit this have little capacity in mathematics. They want the largest earned income possible, which leads them to the unwanted conclusion that they do not want to work more than for the amount allowing the maximum earned income.
Suppose that you are in 2006, a single dad with one kid and an income of $12,000. Then your EITC is $ 2740 which means that over the whole year you enjoyed 12000+2740= $ 14740. If your income was 18000 your EITC would be only 2230 and your total for the year $ 20230. I did interview about 100 people making their taxes in Savannah, the vast majority would say that if they had only $ 2230 this year (compared to, for instance, 2740 last year), they should work less next year. That is because they never add the numbers together, and it is hard to make them accept that in the second case, they have less EITC but they still enjoyed 20230 – 14740 = $ 5490 more. The difficulty for them to understand this is that during the year, they made over three thousand dollars more than the year before, but they have already spent it: they only look at the future money. Therefore, it is not a good law, it needs to be changed: we want people to make more money, not less.
One of the strangest consequences of the EITC is the constant swapping of children. People in Savannah are savvy: they know that the EITC for three or four children is the same as for two children. So if they have three kids, they will give one (on paper) to cousin Smith, so cousin Smith who has no kid yet, came claim one, which would give him $ 2740 (for a 12000 income). The extra EITC money will then be split between the two families. Every January, there is a huge children swap in Savannah and no end to the discussions about who will get the desirable “extra children” on paper. I do not claim that it is illegal: many kids live before and after school with different members of the family. It may not be illegal, but it is not the spirit of the law. The taxpayers have learned how to maximize the benefits of the EITC. It has, however, unhealthy consequences: a lot of mothers with genuine rights to declare their kids, probably, as a rough estimate, 3 to 5 percent of taxpayers, come to discover at tax time that their tax return is rejected because somebody else already claimed their kids. Of course, they can appeal, but all the situations of poor people are complex, family relations are complex, and most of the time the injustice will be committed and will not be corrected. These women do not want to go to trial against their family, they got enough problems, and therefore we do not have reliable statistics.
I met in Savannah one great accountant who told me that such tax laws should be changed every five years, because in five years time, people learn how to distort the system. In the meantime, absurdity reigns: the first woman who told me to “scratch this kid” and added: “It is not my kid any more this year” plunged me in abysmal perplexity.
One young college student, who was making very good money as a golf caddy, asked me how he could increase his EITC. What was I supposed to say? “Get four kids, spread them around, and don’t work too hard?”