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Dilemma -- the Earned Income Tax Credit

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Earlier this week, Max Baucus, the Chair of the Senate Finance Committee, announced that he will not run for reelection in 2014. Baucus is currently working on tax reform with House Ways and Means Committee Chair Dave Camp.

Immediately, some began to assert that Baucus' announcement meant the end of tax reform. Pardon me if I differ, but if anything, it probably helps the tax reform effort a bit by concentrating Baucus more on it. But even if I am wrong, this development is minor at most. Several things present much bigger threats to tax reform. For one, the Obama Administration has demonstrated absolutely no interest in the issue. But then there is the tax code, and the code itself is the biggest single challenge to reforming it.

Our politicians have tried to do too much through the tax law. And that has created a complicated mess of winners and losers that makes the task of trying to reform it, even to some level of sensible, a daunting one.The poster child for this mess is the Earned Income Tax Credit. Like it or not, the EITC is welfare administered through the tax system. Do we really want our tax system to do that?

A lot of liberals are big fans of the EITC. It is an easy way to give money to the poor. It makes many liberals happy - liberals seem to operate a lot on feelings - to give the poor other people's money. A lot of conservatives are big fans of the EITC. They believe that because it assists the working poor, it encourages people to work. Many conservatives - who seem to operate with no feelings - think all poor people are simply lazy.

I struggle with the EITC myself. I think as a society we should all help take care of fellow citizens who are going through a period of trouble. Call me naïve, but I believe that as EITC recipients work their way up the income ladder, they will be paying more income taxes to, in part, help people behind them. And it's easier to get this done not through a spending program but by having the EITC in the tax code.

But things like the EITC have no business in a system that is supposed to collect revenue to support the country. Welfare and taxes, to me, is like oil and water.

And there is another huge problem. The EITC program leaks like a sieve. More bluntly and honestly stated, well-intentioned as it may be, the EITC has been corrupted. Don't take my word for it. Recently, the Treasury Inspector General for Tax Administration released a report stating that up to one-quarter of EITC payments made in fiscal 2012 were improper. How much does that represent? Try $13.6 billion. In one year. Using a ten-year budget window, that's $136 billion, and that's just the tainted stuff.

So, as we think of tax reform, should the EITC stay or should it go?

The definition of dilemma is a choice between two options that seem equally unfavorable. Tax reform requires hundreds if not thousands of those choices.

Bergin is president and publisher of Tax Analysts and an expert on federal tax policy. He also blogs at TaxAnalysts.com.