Taxes and Poverty in the United States

In the Spotlight

The April 15th deadline for filing individual income tax returns, also known as Tax Day, brings to light the state of the nation’s tax system and how it impacts those living in poverty. This year, the continued debate over the federal minimum wage and the varied effectiveness of anti-poverty initiatives has thrusted the Earned Income Tax Credit (EITC) into the spotlight.

The federal EITC is given to low to moderate income working people based on their earnings, marital status and number of children. The credit encourages and promotes work more so than welfare programs as it provides an added financial incentive to employment. In 2012, the EITC was credited with lifting 6.5 million people out of poverty, including 3.3 million children. The credit has also been found to contribute to the economy by supporting and encouraging the expansion of the workforce.

While political ideologies threaten the potential expansion and implementation of the EITC, the valuable credit currently faces more immediate danger. Unregulated tax preparers are preying on clients receiving the credit, creating a number of barriers for people who are eligible to receive its benefits.

The program itself has been cited to be complex and its eligibility requirements can be difficult to navigate, but the credit can also be easily manipulated. The program’s complexity, coupled with the challenges beneficiaries may face accessing assistance in preparing their tax returns and understanding their own eligibility, resulted in inaccurate payments totaling between $11.6 billion and $13.6 billion in 2012.

In addition, many beneficiaries as well as potentially eligible workers may be falling victim to the mistakes or misleadings of tax preparers. Commonly, the price tax preparers charge for their services is contingent on the amount of money their client receives through their income tax rebate. Underqualified or deceitful preparers have been identified to inflate the value of the EITC a client may be eligible for in order to increase the fee they may charge.

Misconduct by the preparer, is commonly viewed by the federal government as the responsibility of the victimized client. In the event that the IRS identifies an error that resulted in the overpayment of a tax credit, it is the client who will be held responsible, and not the tax preparer. This results in fines for the tax payer and having to reimburse the government for overpayment. Additionally, some untrustworthy and under qualified tax preparers have been targeting the poor by charging them exuberant prices for their services. Despite this widespread problem, Washington refuses to act and require any certification for individuals or businesses that offer tax filing services.
For more on the relationship between taxes and poverty please see our special section below.

Direct Service Implications

Tax Day is neither a holiday nor a day of somber observance, but it provokes a range of feelings for all Americans. For low-income workers, thoroughly understanding eligibility for certain tax credits can mean the difference between living above or below the poverty line. The complex process of filing one’s income tax return can easily become a daunting task. It is because of this complexity that many Americans are unaware of their eligibility for certain tax breaks, making them particularly vulnerable to tax preparers who may overcharge for services or fraudulently file a return on their behalf.

Given the potential complications and the importance of filing one’s tax return correctly, especially for those who depend on their rebates, tax payers must be made aware of their rights as well as services designed to aid them in filing their tax returns properly. The Taxpayer Advocate Service (TAS) established by the IRS, serves as a good resource to help taxpayers identify ways to tackle their tax problems. TAS also can assist players with identifying whether or not they are eligible to receive free tax preparation services.

Taxes & Poverty

Institute on Taxation & Economic Policy
Who Pays? A Distributional Analysis of the Tax Systems in All 50 States
The report assesses the level of fairness of the nation’s state and local tax systems. The report analyzes the taxes paid by varying income groups. The most prominent finding of the report is that the majority of state tax systems are fundamentally unfair and disproportionately, negatively impact middle and low income families.

New American Foundation
Connecting Tax Time to Financial Security
An influx of financial resources during tax season can encourage individuals and families to build savings, which could afford them added future economic security. The New American Foundation highlights the policy gaps to address to enable lower-income households to save.

The Atlantic
The Immorality of Evading the Nanny Tax
Americans often pay for child care, elderly care workers, and housekeepers, under the table, reflecting the idea that paying someone “off the books” is a simpler choice. In reality, the employer may be significantly hurting their in-home workers. For household workers, being paid under the table can one day impose long-term consequences such as limiting access to Social Security and Medicare Benefits.

Center for American Progress
Congress Should Reassess the Importance of Two Corporate Tax Breaks
Tax breaks or extenders provide economic security and assistance for many including foreclosure victims and low-income workers. While these benefits have done a great deal to aid the economically disadvantaged, there are also tax extenders that benefit large corporations and damage the nation’s economy.

Courtesy of McSilver Institute of Poverty Policy and Research who has kindly given SJS permission to syndicate this piece.

Disclaimer: The views and opinions expressed in the Policy News Briefs are not necessarily the views of the McSilver Institute for Poverty Policy and Research or NYU’s Silver School of Social Work. If you have comments or suggestions about this service, contact us at mcsilver@nyu.edu.