The Virginian-Pilot 
                             THE VIRGINIAN-PILOT 
              Copyright (c) 1995, Landmark Communications, Inc.

DATE: Sunday, July 9, 1995                   TAG: 9507070019
SECTION: COMMENTARY               PAGE: J4   EDITION: FINAL 
TYPE: Editorial 
                                             LENGTH: Medium:   76 lines

EARNED INCOME TAX CREDIT ABUSES COSTS ARE TOO HIGH

When the IRS tightened rules on Earned Income Tax Credit pay-outs last April, tax preparers and banks that offered ``refund anticipation loans'' bristled. ``It's like saying we're not going to pay welfare this month,'' fumed the president of H&R Block.

It's time taxpayers bristled:

Welfare is what EITC has in large part become: not just a sort of tax-time ``cor-po-rate welfare'' that grossed refund-anticipation lenders some $300 million last year but a cash-transfer program estimated to soon cost federal taxpayers $24.5 billion a year.

EITC was not intended to be welfare. And it is not acknowledged as welfare, lest the welfare-weary public balk.

The Earned Income Tax Credit began 20 years ago to help low-wage earners hurt by a hike in the Social Security tax. It evolved into a program designed, as one proponent says, ``to ensure that families who work year-round will at least reach the poverty line.''

But EITC recipients needn't be year-round or full-time workers, or even be families. ``You can work part-time,'' reports Lisa Schiffren in The American Spectator. ``You can work seasonally. You can work part of the year, receive AFDC part of the year and qualify. Now that the Clinton administration has allowed single, able-bodied workers with no dependents to claim the credit for the first time, many students who work part-time qualify'' for some EITC grant.

In fact, studies by both proponents and opponents of EITC indicate that it offers ``an unambiguous incentive for the non-working to start working, because the EITC increases their after-tax wages substantially.'' But folk already working often work less: ``Because the EITC makes their incomes higher, they are likely to buy more leisure.''

Nor must the wages of EITC recipients be below poverty level. As of 1996, the wage cutoff will climb from $25,296 for a parent and child to $27,000 - more than the median household income in Norfolk, Portsmouth, Suffolk, Franklin and Williamsburg at the last census. The EITC payment, which falls as income rises, will rise to about 40 cents for every $1 earned, or $3,370 on wages of $11,000.

So ``earned'' doesn't mean quite what you'd think. ``Income'' doesn't either. Nor does ``tax credit,'' since almost 90 percent of EITC recipients owe no federal income tax to get a credit for. They get cash instead. And though they can have the EITC paid monthly, 95.5 percent elect to file for it lump-sum on or before April 15. Which means, as a proponent's study points out, ``the links between earnings and benefits . . . are likely to be less clear to recipients.''

It also means mammoth fraud. Nobody's sure of the percentage because until a General Accounting Office report last fall, nobody - not the IRS, the Department of Human Resources, Congress or the Clinton administration - had been monitoring EITC's efficiency or effectiveness. The GAO reported a fraud rate of no less than 30 percent, and possibly as high as 45 percent.

That's $5 billion or $6 billion a year going to people who claim income they didn't earn, or don't claim all the income they did, or file phony W-2s from phony companies claiming phony kids - fraud which fast electronic filing facilitates.

To some EITC proponents, fraud is an inevitable, acceptable cost of society's duty to help the working poor. And it's true that prosecuting $2,000 worth of EITC fraud costs taxpayers $3,000.

But other costs mount more: The cost of increasing taxpayer resentment at all sorts of fraud, from the easy cheats to the political fraud that disguises a cash bonus for some work as a tax credit for a year-round job. The cost of increasing taxpayer doubt that government can do anything right. The cost of increasing government intrusion on everybody's privacy in order to catch the cheats.

Society has a duty to help the poor. For its sake and theirs, society also has a duty to help the poor work, and to level with its taxpaying workers about how public-assistance programs really work, how well they work, and how they can work better. EITC needs reworking. by CNB