Fiscal Policy

The New Child Tax Credit: Welfare Administered by the IRS

(alfexe/Getty Images)
How a new tax credit would accelerate bureaucratic mission creep.

For years, Congress has assigned increased responsibilities to the Internal Revenue Service (IRS), well beyond the task of mere tax collection and administration. The federal government’s delegation of power to unelected bureaucrats has resulted in “mission creep,” with the IRS usurping authority from elected officials.

The problem has been especially pronounced since the Obama administration passed the Affordable Care Act. Beside the Obamacare credit, there are at least six so-called refundable tax credits in the tax code. A tax credit is a provision that reduces one’s final tax bill, dollar-for-dollar. A tax credit differs from tax deductions and exemptions, which reduce taxable income, rather than your final tax bill directly. Deductions and exemptions reduce one’s tax liability by the amount deducted multiplied by one’s marginal tax rate.

Refundable credits work to give people more money in refunds than they actually paid in taxes in the first place. The most notable refundable credit is the Earned Income Tax Credit. For all practical purposes, refundable credits are welfare programs administered by the IRS through the tax code, and driven by one’s tax return.

Congress has again added to the list of refundable credits with a provision of the American Rescue Plan Act. Under the new law we now have a substantially expanded Child Tax Credit. The credit is broken into two elements.

The first element provides that households with children under age 6 may claim up to $3,600 per child as a credit. The second element applies for children ages 6 to 17. In that case, the credit is $3,000 per child. The new rules phase out the additional credit amount for single individuals with Adjusted Gross Income under $75,000, $112,500 for heads of households, and $150,000 for married couples filing jointly.

The credit is now fully refundable, but only for tax year 2021. Under the current rules, one-half of the credit will be mailed to taxpayers in monthly checks beginning in July 2021, continuing through December 2021. The other half may be claimed as a credit against taxes owed on the 2021 tax return (to be filed in April 2022).

The Biden administration is currently pushing to make the refundable aspect of the credit permanent. There is a provision in the American Families Act that would do just that.

The refundable aspect of the credit promises to load even more duties on the IRS. The IRS must determine the amount to be sent to taxpayers every month. That must be based on one’s income, filing status, and both the number and ages of eligible children. The effort to determine the accuracy of the payment to be mailed to citizens will have to be an ongoing process. We all know that the circumstances of peoples’ lives change on a regular basis. Look for the IRS to more actively dig into every aspect of your life in order to enforce the rules applicable to this credit.

The monthly payment system is slated to begin in July. That is probably wishful thinking. Please recall that it took about two years to set up the system of paying advance premium tax credits under Obamacare.

It is quite easy to see how Biden’s plan of loading more refundable tax credits into the law, and making those credits subject to advance payments to citizens, will morph into a system of fixed monthly cash benefits paid by the federal government to tens of millions of American families.

Can you say “Universal Basic Income”?


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