How Obama Will Raise Taxes Without Raising Taxes

The chart to the right shows how, under current law, the CBO projects government revenue to look. So, by doing nothing, the Obama administration can raise taxes simply by letting existing tax provisions expire.

Update on the Homebuyer Tax Credit

Because of the rampant scamming of the system, Congress changed the rules when they extended and expanded the homebuyer tax credit. Now, according to this CNNMoney article, "buyers must now file documentation with their taxes -- including proof of residency, a signed mortgage statement and drivers license -- which the e-file system is not equipped to handle."

However, now taxpayers claiming the credit cannot e-file, and they can expect delays of a few months before receiving the credit. Seems like a reasonable request for the government to actually require documentation, and a reasonable burden for a taxpayer to bear in order to get $8,000.

NPR on Homebuyer Tax Credit Fraud

According to this NPR story, "Thousands of people have gotten first-time homebuyer tax credits they don't deserve ... Some of these suspicious claims come from people who are writing off interest payments on another house." The IRS "highlighted nearly $500 million in homebuyer tax credits claimed by people who don't appear to qualify."

The Wall Street Journal reports:

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit, which starts to phase out at $150,000 of income for couples, $75,000 for singles.

The NPR article points out that "the IRS doesn't require people applying for the credit to prove they've purchased a house." Frank Keith, a spokesman for the IRS, says "the IRS doesn't have the authority to reject a claim for the tax credit without doing a full audit first." So, "the IRS is reportedly trying to audit almost everyone who claims it this year."

Someday, the government should consider opening offices where you can show up, choose from a menu of government handouts, present ID, and walk out with your check. At least that would be efficient. Oh wait, I forgot about my last trip to the DMV.

A 70% Tax on the Poor?

Talk about unintended consequences - the phase-out of subsidies for health insurance in the Baucus bill could end up contributing to a 70% or higher marginal tax rate for people earning between 100% and 200% of the poverty level!

According to James Capretta (here), using the CBO analysis of the Baucus bill, the US government (taxpayers) would provide a $16,500 subsidy for families at the poverty line. As incomes rise, the subsidy declines. A family earning twice the poverty rate would only get a subsidy of $9,072. So, by earning $24,000 more, this family loses $7,428 in government subsidies, or almost 31% of their added income.

Capretta points out other existing government tax breaks that phase out over these income levels, like the Earned Income Tax Credit, which phases out at about $0.21 for each additional dollar earned. This family would lose about $5,000 of their EITC, about another 20% of their added income.

Economist Greg Mankiw (here) adds in additional effects of the payroll tax that bring the marginal tax rate closer to 80%. So, a family of four in 2016 when the Baucus bill would be in full effect, would only get to keep 20-30% of their additional income if they move from the poverty line to double that.

The unintended consequence is that this family has every incentive to just remain poor and beg their Congressmen for additional help. Why work harder if the benefits you lose are almost as big as the extra money you earn? And why not ask for more benefits when you aren't the one paying for them?

A 0% Tax Rate?

An interesting opinion piece in the Wall Street Journal last week made the case that the U.S. tax code has become so screwed up, that a 0% tax rate for the bottom 60% of income earners would be better.

"The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans.

Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues."