Susan Shelley: Trump turns over tables with tariff talk

When former President Donald Trump told Senate Republicans last week that he was thinking about replacing the income tax with an “all-tariff policy,” he once again turned over the tables in politics.

At the old political tables, you’d typically see Democrats accuse Republicans of trying to eliminate Social Security and Medicare, terrifying older voters into supporting whichever Democrat was running for president that year. Republicans would respond by sending out a somber spokesman in a suit to say, “It isn’t true,” or “It’s not they way it sounds,” or “Here’s our lengthy published report about entitlement spending.”

By then, grandmothers had already thrown a shoe at the TV and run off to the polls to vote a straight D ticket.

Enter Donald Trump. That table-crashing sound you hear is Trump putting Democrats in the position of defending the income tax for the rest of this election campaign.

Trump has also proposed eliminating all taxes on tips, a plan he announced in the state of Nevada, where service workers are a big part of the economy and the electorate. For the next four months, the Biden campaign can explain to hotel and restaurant workers why Democrats are against that.

Meanwhile, the lengthy published reports are now coming from the left. The Center for American Progress tried to explain why President Biden’s tariffs are much better than former President Trump’s tariffs and asserted that the plan Trump had floated would “raise taxes for families.”

That claim was based on calculations estimating the price increase on imported goods due to the tariffs, followed by calculations of how much a “typical household” would pay in “taxes” by purchasing the products, assuming no change in behavior.

Much more interesting is what was left out of the lengthy published reports.

The report didn’t say, and most taxpayers do not know, that the income tax system has been turned into a welfare payments system. Over the last 50 years, the Internal Revenue Service has been tasked with processing larger and larger payments to subsidize the incomes of more and more Americans. These payments are not called “welfare.” They’re called “tax refunds.” But they are not refunds of taxes paid.

The Earned Income Tax Credit, for example, was created in 1975 and provided a “refundable” tax credit, meaning people who qualified for the credit could receive it as an income tax refund, even if they had not paid any income taxes at all.

“Tax refunds” had always been the refund of an overpayment. So the term concealed from the taxpaying public what was happening.

Originally, the Earned Income Tax Credit was based entirely on an individual’s earnings, but now it’s much more complicated, and much more generous.

In 2023, the maximum credit was $7,430. To receive the maximum credit as a tax refund, an individual would have to file a tax return reporting some but not too much earned income (maximum $56,838 if filing as single, $63,398 if married and filing jointly) and have at least three qualifying children. Various kinds of income count, including cash income from self-employment, so tax filers who claim these refunds don’t necessarily have, or need, documentation of their income.

And that brings us to the subject of what the Office of Management and Budget calls “improper payments.” OMB defines an improper payment as any payment that should not have been made, or was made in the wrong amount, or was made to someone who wasn’t eligible for it.

Last May, the Treasury Department Inspector General for Tax Administration (TIGTA) reported that in fiscal year 2022, the IRS paid out $57.5 billion in Earned Income Tax Credit refunds, of which $18.2 billion, or 32%, was estimated to be “improper payments.”

The EITC is only one of a list of refundable tax credits. The Additional Child Tax Credit, with total payments of $32.8 billion in FY 2022, had an estimated improper payment rate of 16%, $5.2 billion. The IRS also paid out $5.6 billion for the American Opportunity Tax Credit, of which 36%, $2 billion, is estimated to be “improper.”

This problem has been going on for decades, as have the efforts to try to fix it. Congress enacted the Improper Payments Information Act in 2002, the Improper Payments Elimination and Recovery Act in 2010, the Improper Payments Elimination and Recovery Improvement Act in 2012, and the Fraud Reduction and Data Analytics Act in 2015.

President Barack Obama signed an Executive Order in 2009 titled “Reducing Improper Payments.” President Trump signed the Payment Integrity Information Act of 2019, and before leaving office signed the Consolidated Appropriations Act of 2021, which directed the IRS to make the elimination of improper payments an “utmost priority.”

They all know about this. Only you, the taxpayer, didn’t know.

The income tax system is being “improperly” drained of tens of billions of dollars every year, and there are even more programs that TIGTA is assessing for the risk of improper payments. In 2022, the Net Premium Tax Credit, a subsidy of health insurance premiums, had an improper payment rate estimated at 27%.

TIGTA’s report says IRS management recently advised the inspector general that “there is a growing expectation for the IRS to notify individuals who are potentially eligible for but are not claiming refundable credits to encourage them to file a tax return and claim the credits.” TIGTA warns that such outreach “could result in additional improper payments and increased taxpayer burden.”

That illustrates the problem. Because a lot of politicians want to give taxpayer dollars to people who will vote for them, the IRS is administering a gargantuan system of transfer payments, cloaked in the confidentiality of tax returns, and bled by fraud and error every year.

Trump didn’t just turn over tables with his comments. He turned over rocks.

Write Susan@SusanShelley.com and follow her on Twitter @Susan_Shelley