Tax Code Complications in Biden's Call for More Tax Credits

Posted by Natasha Leone on December 23rd, 2020

Overview

Throughout the 2020 American presidential election campaign, Joe Biden proposed a range of new tax credits for childcare, health insurance, homeownership, and elderly care along with additions in EITC (Earned Income Tax Credit) and CTC (Child Tax Credit)

These proposals will increase the expenditure via tax code and add to the tax code's complexity, redundancy, and error rates. They will also overlook the alternative methods that'll improve the tax code and help people increase their earnings. 

Impact of Tax Credit Proposal

According to the Tax Foundation, these proposals will have a significant bearing on Biden's tax plan. Biden's CTC plan would cost approximately 5 billion in 2021, and the CDCTC (Childcare and dependent credit) plan would total to .7 billion over the next decade.

Similarly, the homebuyer credit would equal 164.6 billion over the next ten years. And the miscellaneous credits would account for 4 billion as lost revenue. Therefore, 0 billion worth of revenue will be reduced according to Biden's tax hike.

Overview

Throughout the 2020 American presidential election campaign, Joe Biden proposed a range of new tax credits for childcare, health insurance, homeownership, and elderly care along with additions in EITC (Earned Income Tax Credit) and CTC (Child Tax Credit)

These proposals will increase the expenditure via tax code and add to the tax code's complexity, redundancy, and error rates. They will also overlook the alternative methods that'll improve the tax code and help people increase their earnings. 

Impact of Tax Credit Proposal

According to the Tax Foundation, these proposals will have a significant bearing on Biden's tax plan. Biden's CTC plan would cost approximately 5 billion in 2021, and the CDCTC (Childcare and dependent credit) plan would total to .7 billion over the next decade.

Similarly, the homebuyer credit would equal 164.6 billion over the next ten years. And the miscellaneous credits would account for 4 billion as lost revenue. Therefore, 0 billion worth of revenue will be reduced according to Biden's tax hike.

Implications of Expanding Tax Credit

Increasing tax credits doesn't address the problem related to incorrect credit expenses. According to the US Department of Treasury, 25% of entire EITC payments are sent off incorrectly. Temporarily increasing tax credits isn't a viable option as it leads to fraud, confusion, and misallocation. 

For instance, some people may say that sending a larger amount of money through means-tested credit, as compared to spending, is a better way of relief for families with low incomes. Suppose that CDCTC benefits people who belong to the upper class and can pay for childcare, not the people who live from one paycheck to the other.

Credits that are considered 'revenues not collected,' just like other tax expenses like charitable or mortgage deduction. Therefore, credits will clear holes in the tax code and become an opportunity for stealth spending. 

Suggestions

These credits make sense if we're thinking long term. However, there are better ways to ensure that families and individuals receive tax relief liquidity in times of crises instead of altering tax credits that won't be available until they file taxes. 

Some suggestions for improving the tax code would include:

  • Lowering the barriers in capital creation via immediate write-offs
  • Simplifying the credits to ensure that the system works effectively by reducing misuse of taxes and ensuring that the taxpayers get the benefits intended by the policymakers.
  • Removing penalties for marriage in income tax and credit rates.
  • Policymakers must draft an enhanced tax code that lowers the compliance burden, removes distortions to marriage, works, has children, and encourages investment.

About Harmon/Harmon

Harmon/Harmon is a CPA firm specializing in real estate. They're based in Austin, TX, and offer investment property evaluation analysis, real estate investment planning guidance, and tax planning and compliance services for real estate investors.


Natasha Leone

About the Author

Natasha Leone
Joined: October 8th, 2020
Articles Posted: 3