Taxing Peter to Improperly Pay Paul (or His Corpse)

Taxes are obviously on everybody’s mind this time of year, which makes it the perfect time to ask where — or to whom — all our money is going.

First things first: In 2014, the government collected roughly $3 trillion. It spent $3.5 trillion. In other words, it had to borrow $500 billion to pay for all the spending on top of the taxes collected.

Of the $3.5 trillion, about half went to pay for “entitlement” programs — though we are not actually entitled to all of them. These programs are better-known as Social Security, Medicare, Medicaid and Affordable Care Act subsidies. So right there, you have $1.77 trillion in spending, with $851 billion going toward paying for seniors’ retirement benefits.

Then, the government spent almost $600 billion on defense spending and $513 billion on “income security” programs, such as food stamps and unemployment insurance. Finally, the government pays some $229 billion in interest, which shouldn’t surprise us, seeing as it has to borrow so much money each year in addition to our existing debt of more than $18 trillion.

Depending on your political leanings, you may find that we spend too much on welfare or too much on defense. But no matter what your party affiliation is, you may be annoyed to find out that the government makes over $100 billion worth of improper welfare payments annually. Some of that is fraud, but some is caused by clerical errors or the failure to verify whether a recipient is eligible — or sometimes even alive!

Not surprisingly, because of the sheer amount of money the government spends on Medicare and Medicaid, that’s also where the most dollars — roughly $65 billion — are improperly paid. To put that number in perspective, the entire budget of the Department of Homeland Security is $43 billion, and we spend $60 billion on education. It is even more than the entire gross domestic product of the small but rich country Luxemburg.

The irony, however, is that the worst offender is the IRS. That’s right, the same agency that collects your hard-earned cash all year long and will go after you with a vengeance if you fail to pay all that you owe is the champion of improper payments.

You see, the IRS oversees a program called the earned income tax credit, designed to offset the regressive effects of the payroll tax for low-income folks by redistributing money to low- and moderate-income working individuals and couples — particularly those with children. Well, every single year, about 24 percent of the money paid goes to people who shouldn’t get it. That’s roughly $14.5 billion.

A 2013 report on the issue from a Treasury Department inspector general revealed the scale of the problem. According to the data, between 2003 and 2012, the amount of improper payments for the EITC alone was over $100 billion — somewhere between $110.8 billion and $132.6 billion. That’s the GDP of Hungary.

But the worst part is that the IRS is doing next to nothing to fix the problem, nor does it seem to be complying with the requirement to provide an annual report to Congress detailing specific information on improper EITC payments.

So the next time you pay your taxes, you might want to consider who is endorsing the check.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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