# Presentation: 247495

## Tax Fairness and Simplification forthe Working Poor

- Presentation to President’s Advisory Panel on Federal Tax Reform
- New Orleans, March 23, 2005
- Mark Moreau
- Low-Income Taxpayer Clinic
- Southeast Louisiana Legal Services

## Earned Income Credit Complexities

- 2004 Major Reforms greatly simplified EITC
- Remaining problems: Amount of Credit and Differing Treatment
- Married filing separate
- Head of household
- Earned income and AGI definitions for community property states
- Joint and shared custody
- Lawsuit recoveries (problem not limited to EITC)

## Is the Earned Income Credit Sufficient?

- Reduces poverty
- Do all workers escape poverty?
- Who is left behind?
- “Official” poverty does not measure real poverty
- “Official” poverty threshold understates poverty - standard should be about 45% higher
- Upper EIC income limit is about 183% of poverty for family of 4
- 200% poverty needed for life’s basic necessities

## Minimum wage workers have different poverty results after the EIC

- Left below “official” poverty threshold:

|  | 
Wages | 
EIC | % of Poverty Threshold |
| --- | --- | --- | --- |
| Married, but separated (domestic violence victim), 2 kids | $9,888 | $0 | 61% |
| Married parents, 2 kids | $9,888 | $3,950 | 71% |
| Single mom, 2 kids | $9,888 | $3,950 | 86% |

## Above “official” poverty threshold:

|  | 
Wages | 
EIC | % of Poverty Threshold |
| --- | --- | --- | --- |
| Single parent, no kids | $9,888 | $134 | 102% |
| Married parents (both full-time workers), 2 kids | $19,776 | $3,303
 | 126% |
| Unwed parents, both full-time workers, 2 kids, 
               Split 2-0 or 1-1 | $19,776 | $3,950 

$5,208 | 122%

129% |

## EIC Problems in Community Property States

- Each spouse must include one-half of other spouse’s income in her income
- Amount is included in AGI for EIC phase out, but it does NOT count as “earned income” for EIC calculation
- Example 1: Wife makes $20,000, Husband makes $50,000
- Wife’s AGI is $35,000--$10,000 plus $25,000
- Wife ineligible for Earned Income Credit—loses $3,000 plus
- Example 2: Wife makes $10,000, Husband makes $40,000
- Wife’s AGI is $25,000, but her “earned income” (and real income) is only $10,000
- As a result, wife loses $2,023 of her EIC refund - This reduces her income to $11,987 or 74% of  poverty

## Domestic Violence -- Leading Cause of Female Poverty

- Many don’t get EIC when they need it.
- No EIC if they left spouse after July 1
- Also, victims in 9 states (30% of US population) lose EIC unless divorced by December 31
- Victims in other states may lose EIC if they can’t qualify for head of household

## Tax Code Wipes Out Lawsuit Recoveries 

- Assume taxpayer with $14,000 wages that wins a modest consumer case, $3,000 damages and $7,000 attorney fees
- Adds $10,000 to income even though never received the attorney fees and can’t deduct them
- Result: The $3,000 recovery is taxed at a 56% rate
- American Jobs Creation Act of 2004—a partial fix of problem
- Fixed the problems created by attorney fees for civil rights cases
- But, did not fix the problems for consumer protection lawsuits and certain other lawsuits

## Perceptions of Tax Unfairness

- Earned Income Credits drained by the “system”
-  Tax return preparation fees
-  Refund anticipation loans
-  Seizure of refunds by creditors in some states (federal law could exempt)
-  Difficult audit process by IRS
- The major complaint from working poor is:
***The difficulty of the IRS correspondence audit procedures***** **
- IRS procedure does NOT work for this low-income population

## Can the Earned Income Credit be Simplified?

- Yes, it already has been
- Possible reform**:**  Consolidate various deductions and credits into one unified credit
- Head of household and dependency exemptions are complex and irrelevant to many taxpayers under EIC income limits
- Can low-income taxpayers do their own returns?
- Maybe, but there are serious functional literacy problems
- I-CAN tax return software has been successful (written in 5th grade English)
- 98% of users find I-CAN easy to use