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Obama Proposes Elimination of Advance Earned Income Tax Credit

2 min readBy: Mark Robyn

As part of the 2010, budget the Obama Administration has announced plans to eliminate the Advance Earned Income Tax Credit. The credit allows individuals who expect to qualify for the Earned Income Tax Credit (EITC), a refundable credit for low income workers, and who have at least one qualifying child to receive part of the credit in each paycheck throughout the year, instead of in one lump sum when they file their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. return. According to the Tax Policy Center, the Advance EITC could provide up to $35 per week in additional income to qualifying families. Part of the reasoning behind the Advance EITC is that the credit will be more beneficial to low income households, who tend to face liquidity constraints, if they can receive it directly in each paycheck rather than having to wait until they file a tax return.

The new administration has made it a goal to help the poor, so why are they trying to eliminate this program? They say that the effect of the program is relatively insignificant, even for the poor. The administration cites the fact that the Advance EITC is utilized by less than 3% of eligible taxpayers (those who would expect to be eligible for the regular EITC). They also say that the amounts received by filers are consistently small, less than $100. Supporters of the program say that the reason program participation is so low is that people are not aware of the opportunity. They say a way to boost participation is for the IRS to do a better job of informing the public of the program.

There are other issues besides program participation. The Government Accountability Office (GAO) found in 2007 that the Advance EITC program is rife with administrative problems and errors. The GAO found a large amount of noncompliance from taxpayers, including failing to file the required tax return, failing to provide valid social security numbers, and misreporting the amount of Advance EITC received. In all, 80 percent of Advance EITC recipients failed to comply with at least one of the program’s requirements.

Obviously, the program has problems. Even so, it is a little surprising that the Obama administration has chosen to eliminate rather than reform the program, given their commitment to helping low income Americans. It seems that in a time of economic difficulty the administration would want to keep any program designed to benefit families in need. But maybe the program’s problems are insurmountable or not worth fixing given the relatively small number of filers that participate. It will be interesting to see if this relatively small provision will actually be implemented next year.