May 13, 2004
EITC: How the Tax Code Subsidizes Immigrants (Including Illegals)
Since 1996 the IRS has encouraged
taxpayers who are not eligible for Social Security
numbers—basically foreigners, including illegal
aliens—to file income tax returns using income taxpayer
identification numbers (ITINs).
At first illegals were wary of
applying for the taxpayer numbers, fearing that the IRS
would
share the information with INS, thereby increasing
the likelihood of
apprehension.
Silly them!
But now, for various reasons,
illegals embrace ITINs. More than seven million ITINs
have been issued by the agency.
(Table 1)
Many think filing tax returns will
help them qualify for amnesty in the future. Moreover,
although the IRS supposedly discourages it, banks have
begun accepting ITINs in lieu of Social Security numbers
on account and
mortgage applications.
Some states even issue
drivers licenses to illegals with the identification
numbers.
By far the most compelling reason
for illegals to file tax returns: the Earned Income Tax
Credit (EITC). Introduced during the
Nixon Administration as an alternative to the
negative income tax, the EITC is the largest source
of cash aid to the poor.
(Table 2)
The EITC works like this: Each
additional dollar earned by a family with income below
$32,000 and two or more children results in a federal
payment of 40 cents—up to a maximum of about $4,000 for
workers earning $10,000 annually.
Workers earning between $10,000 and
$12,500 do not receive any additional EITC. Above that,
they enter the “phase out” range where the credit
starts to diminish as the worker’s income rises.
Thanks in part to IRS
advertising and
“outreach” efforts, EITC spending dwarfs that of
TANF (conventional welfare) and food stamps combined.
In 2002:
As if that wasn’t enough, fraud
plays an alarmingly large role in the amounts
distributed. A recent IRS study finds that from
27% to about 32% of all EITC claims are paid
erroneously. Many EITC recipients claim non-existent
children or children they’ve
left behind with relatives – even though the form
says “resided with you for the entire year.”
Husbands and wives often claim the same kids on separate
returns, not letting on that they are married.
Less publicized, but potentially
even more worrisome, is the
perverse impact EITC has on employers’ incentives.
Knowing that the EITC will replace a big chunk of their
employees’ incomes, employers will take advantage of
subsidy and pay low-wage workers—immigrant and native
alike—less.
Thus the EITC essentially transfers
money from taxpayers to employers, leaving its so-called
beneficiaries as poor as before.
This, indeed, may explain the
program’s
popularity with business types who normally oppose
welfare programs.
Bottom line: not for the first
time,
mass immigration turns out to be incompatible with
the
welfare state—but highly compatible with American
special interests.
[Sources: Sources: Center
for ImmigrationStudies, “Use
of Means-tested Programs,” July 2001.
Center on Budget and Policy
Priorities, “Facts About the Earned Income Credit,”
2002.]
[Number fans click here
for tables.]
Edwin S. Rubenstein (email
him) is President of
ESR Research
Economic Consultants in Indianapolis.
