HARVARD Latino LAW REVIEW
Francine J. Lipman[**]
Many Americans believe that undocumented immigrants are exploiting the United States economy.[1] The widespread belief is that “illegal
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aliens”[2] cost more in government services than they contribute to the economy.[3] This belief is demonstrably false. “[E]very empirical study of illegals’ economic impact demonstrates the opposite . . . : undocumenteds actually contribute more to public coffers in taxes than they cost in social services.”[4]
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Moreover, undocumented immigrants contribute to the U.S. economy by investing and consuming goods and services;[5] filling millions of “essential worker” positions resulting in subsidiary job creation, increased productivity and lower costs of goods and services;[6] and making unrequited contributions to Social Security, Medicare and unemployment insurance
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programs.[7] Eighty-five percent of eminent economists surveyed have concluded that undocumented immigrants have had a positive (seventy-four percent) or neutral (eleven percent) impact on the U.S. economy.[8]
Documented and undocumented immigrants have played a vital role in this country’s economy and development since colonial times.[9] Immigrants “voted in the United States and even held public office from the Colonial Era through the 1920s.”[10] “[N]either the Constitution nor common law jurisprudence present a bar” to extending voting rights to noncitizens, and principles of democracy and equal protection actually support it.[11] For many years, the right to vote was based upon property ownership rather than citizenship, reflecting the rationale that “property owners, including noncitizens, pay taxes and thus they too should have the right to vote.”[12]
Undocumented immigrants, like all citizens and residents of the United States, are required to pay taxes.[13] Despite the historic and strong Ameri-
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can opposition to taxation without representation, undocumented immigrants (except in rare cases) have not enjoyed the right to vote on any local, state or federal tax or other matter for almost eighty years.[14] Nevertheless, each year undocumented immigrants add billions of dollars in sales, excise, property, income, and payroll taxes, including Social Security, Medicare and unemployment taxes, to federal, state and local coffers.[15] Hundreds of thousands of undocumented immigrants go out of their way to file annual federal and state income tax returns.[16]
Yet undocumented immigrants are barred from almost all government benefits,[17] including food stamps,[18] Temporary Assistance for Needy Families, Medicaid, federal housing programs,[19] Supplemental Security Income,
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Unemployment Insurance,[20] Social Security, Medicare,[21] and the Earned Income Tax Credit (EITC).[22] Generally, the only benefits federally required for undocumented immigrants are emergency medical care, subject to finan-cial and category eligibility,[23] and elementary and secondary public education.[24] Many undocumented immigrants will not even access these few critical government services because of their ever-present fear of government officials and deportation.[25]
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Undocumented immigrants living in the United States are subject to the same income tax laws as documented immigrants and U.S. citizens.[26] However, because of their status most unauthorized workers pay a higher effective tax rate than similarly situated documented immigrants or U.S. citizens. Yet these workers and their families use fewer government services than similarly situated documented immigrants or U.S. citizens.[27] Moreover, unauthorized workers have been denied remedies under the National Labor Relations Act by the U.S. Supreme Court,[28] and they may be challenged to receive protection under wage and hour, anti-discrimination and workers’ compensation laws.[29] As a result of all these factors, undocumented immigrants provide a fiscal windfall, and may be the most fiscally beneficial of all immigrants.[30]
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Despite their net positive contribution to public coffers, hundreds of thousands of immigrants enter the United States each year without documents because of impracticable quota and labor certification requirements.[31] These immigration restrictions, combined with the additional tax or “tariff” on undocumented immigrants, are inconsistent with economically effi-cient immigration policy.[32] Moreover, the high effective tax rate imposed on the poorest undocumented working families relative to their less unfortunate friends and neighbors is inconsistent with fundamental tax policy. This Article will describe and analyze the separate, unequal, and unrepresented federal taxation of undocumented immigrants.
Part II of the Article provides a brief description of the demographics of undocumented immigrants. This description provides a foundation for the tax analysis. Part III of the Article describes the tax issues most commonly experienced by typical undocumented immigrants and their families. The tax analysis includes a description of the separate, unequal, and complex treatment of undocumented immigrants under the EITC and the Child Tax Credit (CTC). In addition, Part III includes a description of the new uniform definition of a child, and its implications for undocumented immigrants for the 2005 calendar year and thereafter. While this new defini-tion for a “qualifying child” simplifies the application of the dependency exemption deduction, the EITC, and the CTC, it comes at a significant cost for some undocumented families.
In Part IV, the Article presents the inconsistencies of the separate and unequal treatment of undocumented immigrants with fundamental tax and immigration policies. Finally, Part V of the Article explains the Author’s proposed amendments to the tax system. The proposed amendments make the tax treatment of undocumented immigrant families more consistent with fundamental tax policies and economically efficient immigration policy, and, perhaps most importantly, true to “[t]he principles of human dignity and human solidarity . . . .”[33]
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About eleven million undocumented immigrants live in the United States today.[34] This number increases by approximately 500,000 per year,[35] and has more than doubled in the last decade.[36] Since 1995, the average number of undocumented immigrants arriving in the United States every year has exceeded the average number of arrivals of documented immigrants.[37]
The majority of undocumented immigrants, 57–70%, continue to originate from the United States’ southern-border neighbor, Mexico.[38] Undocumented immigrants also originate from Latin America (23–24%), Asia (9–10%), Europe, and Canada (5–6% combined).[39] More than three million undocumented immigrants, approximately 30% of the current population, arrived in the United States between 2000 and 2004.[40] Another 3.6 million
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undocumented immigrants arrived between 1995 and 1999, and the balance of the population, or 3.5 million immigrants, arrived between 1980 and 1994.[41] Thus, about 65% of all undocumented immigrants have been in the United States for less than a decade.[42]
In southern California, neon yellow highway signs depicting a family on the run warn freeway drivers to be cautious of what appears to be fleeing undocumented immigrants. While the majority of undocumented immigrants enter the United States without documents, 25–40% of undocumented immigrants arrive in the United States with documents, such as student, visitor, or temporary employee visas, and fail to leave or properly extend their documents.[43] “Visa overstayers” originate from a variety of countries. They include most of the undocumented immigrants from Europe, Canada, and Asia, as well as a share from Central America and a small number from Mexico each year.[44]
Undocumented immigrants that enter the United States without authorization are primarily Mexicans and Central Americans that cross into the United States from Mexico.[45] Between 70 and 85% of Mexican immigrants that entered the United States since 1990 did not have valid documentation in 2004.[46] From 1995 to 2004, the number of undocumented immigrants entering the United States each year averaged 400,000 to 485,000. As a result, there are almost nine million undocumented immigrants in the United States today who were born in Mexico or Latin America.[47]
Because so many undocumented aliens cross over the border from Mexico, they have concentrated historically in U.S.-Mexico border states such as California and Texas.[48] More recently, the undocumented population in California, Texas, and other traditional settlement states such as New York, New Jersey, Florida, and Illinois has remained static, while the population outside these states has increased dramatically.[49]
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Approximately 68% of undocumented immigrants reside in eight states, including California (24%), Texas (14%), Florida (9%), New York (7%), Arizona (5%), Illinois (4%), New Jersey (4%), and North Carolina (3%).[50] However, the undocumented immigrant population in certain states, particularly Arizona, North Carolina, Georgia, Tennessee and Colorado, has experienced unprecedented increases, in some cases more than tenfold since 1990.[51] Notably, the undocumented immigrant population of approximately 2.4 million in California has remained static for about fifteen years.[52] The more geographically diverse settlement pattern for undocumented immigrants is reflective of emerging locations for employment opportunities.[53]
Undocumented immigrants primarily come to the United States for better employment opportunities.[54] While family reunification also drives undocumented immigration, many of these individuals are women and children joining their husband or father who emigrated previously for better wages.[55] All major home countries for undocumented immigrants have much lower average wages than the United States.[56] “Average wages in Mexico—the primary source of undocumented immigrants—are about one-ninth those in the United States.”[57]
While poor economic conditions drive immigrants from their countries,[58] the U.S. economy’s growing demand for millions of essential workers lures them to our workforce.[59] As the U.S.-born workforce ages and be-
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comes more educated, the demand for young, essential workers will continue to increase at levels “which the domestic workforce cannot or will not fill.”[60] In addition to filling jobs that are critical to economic growth, once in the U.S. labor force, young, working immigrants contribute significantly to the Social Security trust fund, providing a projected net benefit of “almost $500 billion from 1998–2022.”[61]
Immigrant workers have long been an indispensable part of the U.S. labor force, compensating for shortfalls in numerous occupations and industrial sectors.[62] Put simply, the supply of immigrants is driven by the economic need the United States has for workers.[63] This demand far exceeds the supply of green cards or opportunities for U.S. citizenship.[64] Consequently, undocumented immigration, especially from less-developed border countries such as Mexico, is a lucrative and foreseeable phenomenon for the United States and its source countries.[65]
Because of this demand for essential workers, and the economic distress throughout the globe, about seven million undocumented immigrants
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are currently working in the United States.[66] This group represents one out of every twenty workers in the U.S. labor force.[67] More than ninety percent of adult undocumented immigrant males and more than fifty percent of adult undocumented females are in the labor force.[68] Undocumented adult men and women tend to be young: statistics show that very few are over the age of forty.[69] They are therefore less likely to be disabled, retired, or in school, but more likely to be married and parents of young children.[70] As a result of these demographics, undocumented men are more likely to be employed than men who are documented immigrants or U.S. citizens.[71] However, undocumented women are more likely than U.S. citizens to be at home caring for their young children.[72]
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Undocumented immigrants “tend to be strong, courageous, vigorous, entrepreneurial types who enrich our economy and civilization with their drive and creative powers.”[74] Undocumented immigrants are gardeners, housekeepers, cooks, nannies, waiters, dishwashers, seamstresses, handymen, facilities maintenance personnel, construction workers, factory workers, welders, and producers of low-priced food.[75] Yet, despite the hundreds of times every day undocumented immigrants across the United States interact with U.S. citizens as an unrecognized driving force in the economy, they are feared, hated, and misunderstood.[76]
Because of critical U.S. demand for manual labor and the physical challenges of crossing the border, undocumented immigrants are predominately adult men (48%).[77] High rates of marriage and childbirth (relative to U.S.
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citizens) contribute to the fact that 38% of all undocumented immigrants are adult women and the balance, or 14%, are children.[78] About 3.1 million children living with undocumented families (families in which the head of the household or the spouse is undocumented) were born in the United States.[79] That figure is twice as large as the number of undocumented children.[80]
These 13.9 million people comprise more than six million undocumented families living in the United States.[81] Undocumented immigrants tend to be very young, and so are less likely to be married with children when they arrive in the United States.[82] Consequently, most of these households are single men (36%) or women (12%) or couples (9%) without any children.[83] The remaining households (41%) are families with only U.S.-born children (55%), with mixed status children (25%), or all undocumented children (20%).[84]
Although larger than non-immigrant[85] families (averaging 1.96 family members), undocumented immigrant families tend to be smaller than other immigrant families, with an average family size of 2.29 (reflecting averages of 2.05 and 2.65 for undocumented families in the United States less than ten years and ten years and more, respectively).[86] However, this statistic may be misleading because of the large number of undocumented single person households included in this average.[87] Accordingly, the average family size for undocumented immigrant households with children is neces-
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sarily greater than these averages reflect.[88] Moreover, the children in undocumented immigrant households tend to be under the age of six and born in the United States.[89] Undocumented immigrants are young, able-bodied, hard-working solo adults, or married men with wives and one or more young children, who have been in the United States for less than ten years.[90]
Despite the high rate of employment and the presence of two-parent families, undocumented immigrant families are many times more likely to have family incomes below the poverty level.[91] Marriage and work have not been an antidote for lack of education and English proficiency.[92] Forty-nine percent of undocumented immigrants have not completed high school, although twenty-five percent do have some college education.[93] Notably, the education level of undocumented immigrants arriving more recently in the United States is higher than that of those who have been in the country for a decade or more.[94] Nevertheless, limited education often accompanies limited English proficiency.[95] Most undocumented immigrants lack critical English language skills.[96] Language barriers only enhance the constant level of fear undocumented immigrants have of job loss, deportation, or even retaliatory violence to them or their families if they assert any rights.[97]
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As a result, millions of unauthorized workers toil for long days at poverty-level wages, with few benefits or civil rights.[98] Almost sixty-six percent of unauthorized workers earn less than twice the minimum wage and are categorized as low-wage workers.[99] Moreover, two million immigrant workers earn less than the minimum wage.[100] Full-time, annual employment at minimum wage provides a family of three with less than seventy percent of the Federal Poverty Income Guideline.[101] The average income per person for undocumented families is only $12,000, or less than fifty percent of the average for non-immigrants.[102]
In 2003, the average family income for undocumented immigrants was $27,400.[103] This income level is notably lower than average family income levels for legal immigrants ($47,800) and U.S.-born families ($47,700).[104] Not only do unauthorized workers earn low wages, they are unlikely to receive any employer-provided health benefits, paid leave or disability insurance.[105] More likely, unauthorized workers are vulnerable targets of sub-minimum wages, substandard working conditions, and physical and psychological abuse with little meaningful recourse.[106]
Unauthorized workers are an inexpensive source of labor who “can demand nothing in return: ‘[they are] isolated by language, hidden from the government by employers who also are breaking the law, without social or legal recourse, and increasingly—and unfairly criminalized in the public mind by high-ranking officials of both political parties.’”[107] These hard working, “essential,” but unauthorized workers and their families are the growing population of the invisible working poor of America.[108] Never-
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theless, they receive virtually no government assistance[109] and cannot vote, but bear disproportionately high effective federal, state and local excise, sales, property, payroll and income tax rates.[110]
Since the enactment of the Revenue Act of 1913, the federal government has subjected non-U.S. citizens residing in the United States (with or without documents) to income tax in the same manner as U.S. citizens.[112] Non-U.S. citizens residing outside of the United States are subject to tax under a separate and different set of rules.[113] Thus, for federal income and employment tax purposes, non-U.S. citizens, or “aliens” under the Code, are subject to tax based upon their residency status.[114]
If a non-U.S. citizen is a U.S. resident, under the Code, she will be characterized as a “resident alien” for tax purposes.[115] A resident alien is subject to the same income, employment tax and tax withholding laws as a U.S. citizen.[116] Accordingly, a resident alien is subject to federal income tax on her worldwide income regardless of its source.[117]
If a non-U.S. citizen is not a U.S. resident, under the Code, she will be characterized as a “nonresident alien.”[118] As a result, she will generally only
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be subject to federal income tax on her U.S.-source income, e.g., wages for services performed in the United States, rents from U.S. real property, and income effectively connected with a U.S. trade or business.[119] The tax rates and allowable deductions from which a nonresident alien’s U.S. income tax liability is derived vary depending upon the nature of the income.[120]
In general, an individual is classified as a “resident alien” for tax purposes if she meets the qualifications under either of two residency tests.[121] If an individual does not satisfy the requirements of either test, or qualifies for an exception to these tests, she will be classified as a “nonresident alien.”[122] The first test classifies any alien that is a “lawful permanent resident” of the United States at any time during the calendar year as a resident alien.[123] An alien is a “lawful permanent resident” under the Code if she has been granted permanent residence status under the immigration laws that has not been revoked or abandoned.[124] Undocumented immigrants do not satisfy the requirements under this test.
The second test is the “substantial presence test.”[125] Under this test, if an individual is physically present in the United States for at least 31 days during the current year, and at least 183 days during the current year and prior two years, she will be classified as a resident alien.[126] To calculate the days of physical presence for the current tax year, an individual must count all days present in the current year, one-third of the days present in the prior year, and one-sixth of the days present in the second preceding year.[127] While there are several exceptions to this general rule,[128] most undocumented immigrants residing in the United States will be classified as “resident aliens” for tax purposes. This classification begins on the first day of physical presence in the United States, and will continue until an individual becomes a U.S. citizen or leaves the United States for a period of time long enough to fail the substantial presence test.[129]
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Under the Code, a resident alien is subject to the same tax laws as a U.S. citizen.[130] However, even though undocumented immigrants are classified as resident aliens for tax purposes because of their undocumented status, they are treated less favorably under the Code than similarly situated resident aliens and U.S. citizens. The next Section will describe the separate, unequal, and “unrepresented” federal income tax treatment of undocumented immigrants.
Because the U.S. government classifies undocumented immigrants as resident aliens, they are subject to the same federal income and employment taxes and filing and withholding requirements as U.S. citizens. Under the Code, every taxpayer must have a unique and permanent number.[131] Consequently, undocumented immigrants must obtain a TIN.[132] The IRS has used a TIN system to improve its “ability to identify and access database records; to match information provided on tax and information returns, statements, and other documents with the proper taxpayers; and to provide better customer service to taxpayers.”[133] For most non-business taxpayers, Social Security numbers (SSNs) serve as taxpayer identification numbers.[134] However, because undocumented immigrants are not eligible to work in the United States, they cannot obtain valid SSNs.[135]
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SSNs have been issued to workers since the implementation of the 1935 Social Security Act.[136] The initial purpose of the number was to provide employers and the U.S. government the means to report or track Social Security earnings for purposes of payroll tax and retirement benefits calculations.[137] In the 1960s, computerization allowed the IRS and private businesses to rely on SSNs as a method of accumulating, sorting, and tracking information.[138] Despite persistent Congressional concern about unauthorized workers, the government issued Social Security cards to unauthorized workers until the early 1980s, and kept only internal records regarding their unauthorized status.[139] Beginning in 1982 and 1984, Social Security cards issued to unauthorized workers were marked “Not Valid for Employment,” and temporarily authorized workers received cards marked “Valid Only With INS Authorization.”[140]
In an effort to stop unauthorized workers from being hired, Congress enacted the Immigration Reform and Control Act of 1986.[141] This Act, among other things, required employers to have all new employees prove their identity and work authorization with specific documents.[142] Congress listed the Social Security card as an acceptable document evidencing proof of work authorization.[143] As a result of this mandatory obligation, there is now widespread use of counterfeit Social Security cards among unauthorized workers, making “it more common and easier than ever for undocumented workers to enter and function in the U.S. labor market.”[144]
In 1996, the Social Security Administration (SSA) began limiting its issuance of SSNs to individuals who are U.S. citizens, and alien individuals legally admitted for permanent residence or under another immigration category authorized for employment in the United States.[145] In response to this void, the IRS introduced a new taxpayer identification number for use by individuals who are not citizens or nationals of the United States and
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are not eligible for SSNs.[146] Qualifying individuals must apply for and use the newly created TIN on all their tax returns.[147]
The new IRS-ITIN is intended to provide taxpayers with a unique TIN to be used as identification on all tax returns (including income, gift, estate tax, amended, and refund) filed after December 31, 1996.[148] The ITIN is a nine-digit number resembling a SSN, but starting with the number “9” and having the number “7” or “8” as the fourth digit.[149] Qualifying taxpayers must apply for an ITIN using a Form W-7 Application for Individual Taxpayer Identification Number, which requires taxpayer information, including the individual’s name, address, foreign tax identification number (if any), and specific reason for obtaining the ITIN.[150] In addition, the IRS may prescribe that an applicant provide documentary evidence to establish her alien status and identity.[151] “Examples of acceptable documentary evidence for this purpose may include items such as an original (or a certified copy of the original) passport, driver’s license, birth certi-ficate, identity card, or immigration documentation.”[152] Notably, the ITIN is “for tax purposes only and [does not] affect immigration status, authorize work in the United States or provide eligibility for Social Security bene-fits . . . .”[153]
Undocumented immigrants are not authorized to work in the United States, and therefore are not eligible for SSNs.[154] As a result, any undocu-
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mented immigrant required to file a U.S. tax return must obtain an ITIN for tax reporting and filing purposes.[155] However, an ITIN does not authorize work in the United States, and cannot be used for employment tax or SSA purposes.[156] Nevertheless, employers are required to pay employment taxes and provide a SSN to the IRS and the SSA for wages paid to each employee.[157] Unauthorized workers and their employers cannot use ITINs for employment tax or SSA purposes, and they are not eligible for SSNs because they are not authorized to work in the United States.[158] Employers desperate for workers and undocumented immigrants desperate for wages either avoid the system completely through unreported wages, or comply with fraudulently obtained SSNs.
Predictably, there has been an explosion of counterfeit Social Security cards and false use of SSNs by unauthorized workers and their employers.[159] Each year, hundreds of thousands of tax returns are filed with ITINs and Forms W-2 with invalid SSNs attached.[160] In the year 2000, 353,000 resident aliens who were not authorized to work in the United States filed tax returns with ITINs, and seventy-five percent of these returns included Forms W-2 with invalid SSNs.[161] In such cases, the IRS recommends using the ITIN as the TIN, but interprets the filing as an admission that the wage-earner was not authorized to work in the United States.[162] Alternatively, if the taxpayer uses the invalid SSN, the taxpayer is perpetuating her violation of U.S. tax laws and the Social Security Act.[163]
If the taxpayer uses her ITIN and attaches an invalid SSN to her W-2, the IRS will process the return under the ITIN.[164] In response to the filing, the IRS will notify the taxpayer in writing that a corrected W-2 must be filed with the ITIN.[165] While this request cannot be properly imple-
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mented because an ITIN is not a valid TIN for a W-2, once the IRS resolves the mismatch of the ITIN and the SSN by verifying that the taxpayer’s information is presented on the W-2, it may process the return and assess the tax liability, or issue the refund.[166]
The magnitude and administrative cost of mismatched Forms W-2 and ITINs are staggering and exploding.[167] “The IRS has estimated that of the approximately 130 million individual income tax returns filed each year, about six million are filed by undocumented workers.”[168] Returns with mismatched TINs cannot be filed electronically and must be processed through a more expensive, time-consuming, and labor-intensive process.[169] In addition, the SSA reports that about twenty million, or five to ten percent, of the Forms W-2 filed each year contain a mismatch between the name and SSN.[170] The cost of trying to resolve each mismatch averages over $300, whereas the cost of a normal posting is less than fifty cents.[171] Thus, the SSA’s administrative cost of these mismatches is more than $5 bil-lion each year. The earnings listed on the mismatched Forms W-2 must be posted to an earnings suspense file, which as of 2001 had a balance of $421 billion, unless and until they can be allocated to the proper worker.[172] In the case of an unauthorized worker’s earnings that are posted to the suspense file because she does not possess a valid SSN, there cannot be a reallocation unless and until the worker obtains a valid SSN.[173]
Unauthorized workers and their employers must pay Social Security payroll taxes.[174] The amount of Social Security taxes paid by unauthorized workers and their employers has been increasing steadily, and is now in the billions of dollars. In 2003, the government collected an estimated $7 billion in Social Security taxes, or approximately one percent of overall revenue, from 7.5 million workers with mismatched SSNs, and their employers.[175] This dollar amount has more than tripled in the last decade.[176] While some of the mismatches are due to clerical errors, many can be
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traced to unauthorized workers.[177] Unauthorized workers who pay Social Security taxes through withholding will not receive any Social Security retirement benefits with respect to their payments as long as they are not authorized to work in the United States.[178]
One remedy to this nightmare is that employers may choose to pay unauthorized workers cash “under the table,” forgoing sending tax payments or information to the IRS or SSA.[179] This alternative also comes at a significant cost to the U.S. government. In her 2003 annual report to Congress, the National Taxpayer Advocate warned, “a change in the tax compliance of even 1 percentage point equates to an annual loss of more than $20 billion of revenue to the federal government.”[180] Fortunately, unauthorized workers are motivated to file annual income tax returns because they understand it is an important step toward naturalization.[181] In addition, if they do achieve lawful status, work authorization and a valid SSN, they may then apply for Social Security benefits based on all Social Security–covered earnings regardless of their work status during the earning period.[182] Only wages that are reported to the SSA, and not paid “under the table,” count toward the forty quarters of earnings required to qualify for Social Security retirement benefits.
As a result of a convergence of mutually exclusive requirements, undocumented immigrants are in an impossible situation.[183] First, undocumented immigrants are required to use ITINs, a separate and distinct TIN for tax filing and reporting purposes. The government created ITINs specifi-cally to identify and distinguish unauthorized aliens from other taxpayers. However, ITINs cannot be used for reporting wages or paying payroll taxes to the SSA or IRS. Yet unauthorized workers and their employers are subject to, and must pay, Social Security taxes. Consequently, billions of dollars each year are paid to the SSA with invalid SSNs because properly obtained ITINs cannot be used. Similarly, each year hundreds of thou-
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sands of annual income tax returns are filed with valid ITINs and invalid SSNs. The SSA and IRS spend billions of taxpayer dollars each year trying to reconcile earnings and tax payments to wage earners who cannot exist (but do by the tens of millions and growing) because they are unauthorized. Undocumented immigrants will never have their Social Security–covered earnings credited to their ITINs because ITINs cannot be used for this purpose. As a result, unless an unauthorized worker becomes authorized, she will not realize any benefit from these Social Security–covered earnings and tax payments. While confusing and obscure, this treatment is clearly separate and unequal.
Irrespective of the nightmare of complying with TIN requirements,[184] undocumented immigrants, classified as resident aliens, are subject to federal income tax using the same general tax formula that applies to U.S. citizens and documented immigrants. Understanding this tax formula is critical to an understanding of the substantive tax differences facing undocumented immigrants. The next Section will present the tax formula and apply it to a hypothetical undocumented immigrant taxpayer.
Under the Code, undocumented and documented immigrants and U.S. citizens compute their annual tax liability by calculating their taxable income and applying the appropriate tax rates.[185] Taxable income is derived by reducing gross income by allowable deductions.[186] Gross income is broadly defined and includes “all income from whatever source derived, in-
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cluding (but not limited to)” compensation for services, interest, rents, dividends, income derived from business, and dealings in property.[187] For most undocumented immigrants and their families, gross income will include wages from desperately sought U.S. jobs. According to the demographics presented above, undocumented immigrants average about $12,000 in annual compensation per person, or $26,000 per household.
Deductions from gross income include a “standard deduction” or certain itemized deductions; the “deduction for personal exemptions”;[188] and certain other listed deductions.[189] For most low-income taxpayers, the only applicable deductions against their gross income are the standard deduction and personal exemptions. The amount of the standard deduction is dependent on a taxpayer’s filing status, and is indexed annually for infla-tion.[190] In 2005, the standard deduction amount was $5,000 for an unmarried taxpayer or a married filing separately taxpayer, $7,300 for a head of household taxpayer, and $10,000 for married filing jointly taxpayers.[191] The personal and dependency exemption amount in 2005 was $3,200 for each exemption.[192]
A hypothetical unauthorized worker named Abe is an industrious man of twenty-eight years. Abe is one of seven million unauthorized workers in the United States and one of the eleven million undocumented immigrants. He came to the United States with his wife, Abigail, by crossing over the border from Mexico. Abe, Abigail and their U.S.-born daughter, Ariel, now live in Santa Ana, California. Abe works as an employee at a hotel very near what some call the “happiest place on earth.” In accordance
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with his employer’s hiring requirements, Abe produced a SSN card. Abe had obtained the SSN card for sixty dollars from a gentleman who stands outside of the local grocery store. In accordance with federal law, the government issued Ariel a SSN shortly after she was born.
Abe works hard, long hours, and in 2005, earns $15,000. While his employer pays him the minimum wage in California, he does not receive an increase in his hourly rate of $7.50 per hour as required for any overtime hours. Abe is classified as a low-wage worker because he earns less than twice the federal minimum wage. Nevertheless, Abe is happy to have a steady job and an income many times higher than he could ever hope for in Mexico. Abigail stays at home with Ariel because Ariel is not yet in school, and the family cannot afford the available day care facilities in their neighborhood.
To compute their taxable income, the Adams family reduces their gross income of $15,000 by the married filing jointly standard deduction of $10,000 and an aggregate personal and dependency exemption deduction for three individuals of $9,600.[193] The federal taxable income is $0.[194] The federal income tax liability is also $0 before consideration of any tax credits.[195]
Abe is subject to Social Security payroll taxes on his wages of $15,000. His share of Social Security payroll taxes is 7.65% of $15,000, or $1,148. His employer’s contribution on his behalf is also 7.65% of his wages paid of $15,000, or $1,148.[196] However, because Abe is an unauthorized worker, he does not have a valid SSN, so the SSA posts his Social Security–covered wages of $15,000 to the earnings suspense file. The Social Security trust fund is still increased by an unsuspended amount of $2,296. Abe’s total tax liability of $1,148[197] on $15,000 of household gross income generates an effective tax rate of 7.65%, or the Social Security payroll tax rate on wage earners.[198] Abe will not realize any benefit from his Social Security–covered earnings and tax payments because his contribution cannot be credited to his ITIN, even though his contribution increases the Social Security trust fund. Because of the standard deduction and personal and dependency exemption deductions, many low-income undocumented immigrants do not pay federal income tax, but they are subject to and pay So-
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cial Security payroll taxes on every dollar of reported wages yielding an effective tax rate of 7.65%.
The application of the tax formula to the Adams family assumes that the Adams file their tax return using the married filing jointly filing status. Since undocumented immigrant families are often split apart because of economic and immigration challenges, the appropriate filing status may not be married filing jointly. A taxpayer’s filing status does have meaningful implications on her tax rates, standard deduction amount, and other substantive tax matters.[199] The filing status generally depends upon the taxpayer’s personal circumstances.[200]
Individual taxpayers are grouped into four different classifications, including: married filing jointly, head of household, unmarried individual, and married filing separately.[201] Classification of an individual into one or more of these categories depends upon various facts and circumstances of the taxpayer and her family for each tax year.[202] For many undocumented immigrants who are married, but live apart from their spouse and children due to economic and other circumstances, this classification is more complicated than whether the taxpayer is married.[203] Under the Code, a taxpayer’s spouse and children who are not U.S. citizens and do not reside in the United States are classified as nonresident aliens.[204] This combination of varying tax classifications, a resident alien taxpayer, a nonresident alien spouse, and nonresident alien children, adds potentially adverse tax consequences to the tax formula.
Taxpayers who are married as of December 31 of the relevant tax year may generally elect to file a joint income tax return for the entire tax year.[205]
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Generally, a married filing jointly tax return cannot be filed if either spouse is a nonresident alien at any time during the tax year.[206]However, both spouses can elect to treat the nonresident alien spouse as a resident alien to file a married filing jointly tax return.[207]
The effect of this election is far-reaching. The nonresident alien will be treated as a resident alien for all subsequent tax years in which either spouse is a resident alien for any part of the tax year.[208] This election will cause the nonresident spouse’s income that would otherwise not be subject to federal income tax to be included with her resident spouse’s income and subject to tax.[209] While the election may be terminated by the couple, once terminated, the election cannot be made for any subsequent tax year.[210] Otherwise, each spouse will have to file as married filing separately, or, under certain circumstances, as head of household.
The married filing separately status is available to any married taxpayers who do not make the married filing jointly election.[211] The married filing jointly status is generally disadvantageous. Married taxpayers who file separately, among other things, do not qualify for the EITC, the child and dependent care expense credit, or relief from taxation of Social Security benefits.[212] Married taxpayers who have filed separately are generally permitted to amend the returns to file jointly, unless the statute of limitation has lapsed or either return is subject to certain government controversies.[213] Notably, married taxpayers who elect to file their tax return jointly cannot amend the jointly filed tax return to file as married filing separately after the due date.[214] Therefore, before taxpayers, especially undocumented immigrants married to non-U.S. citizens and residents, elect to file jointly, they should explore all tax filing status alternatives, including the possibility of filing as head of household.
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Under certain circumstances, the head of household filing status may be advantageous. The head of household tax rates and standard deduction amount are generally more favorable than the unmarried or the married filing separately filing statuses. To qualify for head of household filing status, a taxpayer must be unmarried on the last day of the tax year.[215] A taxpayer who is legally separated from her spouse under a decree of divorce or a separate maintenance agreement qualifies as unmarried.[216] In addition, an individual married to a nonresident alien spouse is not married for tax purposes if the couple does not elect to treat the nonresident as a resident and file jointly.[217]
Another requirement is that the taxpayer must maintain as her home a household that is the principal place of residence for a qualified dependent for more than one-half of the taxable year.[218] Alternatively, the taxpayer can maintain a residence that is the principal place of residence for her father and/or mother, who is or are, as the case may be, qualified dependents.[219] Finally, the taxpayer must provide more than one-half the cost of maintaining the household during the tax year.[220]
To qualify as a dependent under the Code, the taxpayer and the dependent must satisfy a number of requirements. These requirements were recently amended under the Working Families Tax Relief Act of 2004, which was signed into law by President George W. Bush in January 2004.[221] This revised definition of a dependent is effective for tax years beginning after December 31, 2004.[222] Accordingly, the new definition is effective for the 2005 calendar year tax year.
Under the revised definition, a dependent includes a “qualifying child” or a “qualifying relative.”[223] In both cases, a dependent must be a U.S. citizen or resident, or a resident of Canada or Mexico.[224] The most signifi-cant change to the definition of a dependent is the new uniform definition
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of “qualifying child.” Congress intended that this new definition simplify and make more uniform the qualification for a dependent child throughout the Code.[225] This definition will be used to qualify taxpayers for head of household status as well as for the Child Tax Credit (CTC), the EITC, and dependency exemptions.[226]
A “qualifying child” is broadly defined as the taxpayer’s child; a descendant of the taxpayer’s child; a brother, sister, stepbrother, or stepsister of the taxpayer; or a descendant of any such relative.[227] The qualifying child must be under the age of nineteen (or the age of twenty-four if a student) as of the close of the tax year.[228] Finally, a qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the taxable year.[229]
The new definition of dependent retained much of the old definition in its definition of a “qualifying relative.”[230] A qualifying relative is an individual who bears a relationship to the taxpayer similar to the relationships described for a qualifying child; who is the taxpayer’s parent, grandparent, aunt, uncle, son or daughter-in-law, father or mother-in-law, or brother or sister-in-law; or who has lived with the taxpayer as a member of her household for the entire year.[231] In addition, a qualifying relative cannot have gross income equal to or in excess of the exemption amount.[232] Finally, the taxpayer must provide over one-half of the qualifying relative’s support.[233]
The head of household filing status is likely a better tax alternative to unmarried or married filing separately. Because undocumented immigrants
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may be married to nonresident aliens and have dependent children or parents, they may have the opportunity to file as head of household.
Under the application of the tax formula to our hypothetical undocumented immigrant family[234] above, we assumed that Abe, his wife, Abigail, and their U.S.-born daughter, Ariel, were living together in Santa Ana, California. The question of filing status becomes more interesting if we change the hypothetical by assuming that Abigail and Ariel have not yet joined Abe in the United States, but are residing in Mexico. For tax purposes, Abigail and Ariel are classified as nonresident aliens, and Abe will be classified as a resident alien.
Under this fact pattern, Abe and Abigail may file as married filing jointly if they elect to treat Abigail as a resident alien for tax purposes.[235] However, if they make this election, all of Abigail’s non-U.S. source income would now be subject to federal income tax and wage withholding unless and until they decide to terminate the election.[236] Moreover, Abigail would have to obtain an ITIN and sign the jointly filed tax return, and would be jointly and severally liable for any resulting tax liability.[237] In many cases where the nonresident spouse has little or no income, this will be the most tax favorable alternative.[238] However, because of lack of a myriad of resources, including finances, education, language skills, and information, Abigail may not be able to obtain an ITIN or even sign the tax return. Alternatively, Abe could try to file without Abigail under the head of household filing status.
If Abe and Abigail cannot satisfy the requirements to elect to treat Abigail as a resident alien for tax purposes, they will not be able to file using the married filing jointly status. Fortunately, under the requirements for
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head of household status, if they do not make this election they will be treated as unmarried. Therefore, Abe will be able to file as head of household without Abigail if he can satisfy the other requirements for this filing status.
Under the head of household filing status, a taxpayer must maintain as her home a household that is the principal place of residence for a qualified dependent for more than one-half of the taxable year.[239] The taxpayer must also provide more than one-half the cost of maintaining the household during the tax year.[240] Abe more than likely provides most of the cost of maintaining his family’s household in Mexico and his own household in the United States. Moreover, because he provides over one-half of Ariel’s support, she should qualify as his dependent. Unfortunately, because Ariel does not live in the same household as Abe, he will not qualify for head of household filing status.
Alternatively, a taxpayer can maintain a residence that is the principal place of residence for his father and/or mother, who is or are, as the case may be, qualified dependents.[241] Therefore, if Abe provides over one-half of the support for one or both of his parents, and provides over one-half the cost of maintaining their household in Mexico, he can claim them as dependents and qualify for head of household filing status.[242] However, once again Abe’s mother, father or both, as qualifying dependents, will have to file for and obtain ITINs.[243] If this was not practicable for Abigail, thereby precluding married filing jointly tax status, then it is likely not practicable for Abe’s parents even if they qualify as his dependents. Without an ITIN for any qualifying dependent, Abe will not be able to qualify for head of household filing status. Unfortunately, the remaining alternative has adverse tax consequences that are meaningful, far-reaching, and not well understood even by trained tax professionals.
If Abe and Abigail do not have the resources to elect to treat Abigail as a resident alien, Abe will not be permitted to file jointly with his spouse.[244] Moreover, because Abe does not live in the same household as his dependent child for at least one-half of the tax year, he cannot qualify
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for head of household filing status.[245] Therefore, he will have to file as married filing separately. This filing status will cause Abe’s federal income tax liability for the current tax year to increase meaningfully from $0, as married filing jointly, to $360.
Abe’s gross income of $15,000 will be reduced by the married filing separately standard deduction of $5,000 and his personal and dependency exemptions deduction for himself and Ariel of $6,400. Abe will not enjoy the deduction for personal exemption for Abigail because the couple is not filing jointly.[246] Because Abe does not live with Ariel for more than one-half of the tax year, she will not qualify as a dependent under the new definition of “qualifying child.” However, Ariel should qualify as Abe’s dependent under the “qualifying relative” definition because Abe provides over one-half of her support.[247]
Abe’s federal taxable income will be $3,600 and his income tax liability will be $360.[248] Abe will be subject to Social Security payroll taxes on his wages of $15,000. His share of Social Security payroll taxes will be 7.65% of $15,000, or $1,148.[249] Abe’s aggregate tax liability of $1,508[250] on $15,000 of household gross income will generate an effective tax rate of over ten percent.[251]
Because of the risk and expense of undocumented immigration, undocumented immigrants tend to be young men. Even if an immigrant is married with children, like Abe, he may immigrate to the United States without his family to try to earn a living.[252] This scenario, as demonstrated above, lends itself to undocumented immigrant families filing their tax returns using married filing separately status. These individuals are trying, but barely succeeding in earning a living. Almost half of immigrant workers earn less than twice the minimum wage and will be categorized as low-wage workers, and many of them are undocumented.[253] Unfortunately, the married filing separately filing status versus the head of household, married filing jointly, or unmarried filing statuses, could have adverse tax consequences for low-wage working immigrant families like
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the Adams family. The adverse tax consequences are complex and not widely known or understood by experienced tax professionals, or more critically, the undocumented immigrant community. The next Section will continue to explain this separate, unequal, and complex tax treatment of undocumented immigrants.
Low-income undocumented immigrants pay little or no federal income tax because of the offset against gross income of the standard deduction and personal and dependency exemptions. Their dangerous and underground existence,[255] however, has led some undocumented immigrants to file as married filing separately taxpayers and to pay more federal income tax than they would if they were able to enter this country with their families intact. In addition to federal income tax, unauthorized workers pay Social Security taxes on every dollar of reported wages at 7.65%.[256] Therefore, these poverty-level workers are paying federal income and payroll taxes at a minimum rate of 7.65%.
There is a broad-based consensus that low-income, working families should not pay taxes.[257] In early 1972, then-Governor Ronald Reagan, testifying before Congress regarding a workfare approach to government assistance, “suggested that the federal government should exempt low income families from income taxes and give them a rebate for their Social Security taxes.”[258] Several years later, in 1975, Senator Russell Long, the conservative Democrat chairman of the Senate Finance Committee, and Congressman Al Ullman, the moderate chairman of the House Ways and Means Committee, were able to package the idea in a refundable tax credit and garner liberal support for the EITC.[259] Since it was developed and estab-
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lished in 1975 by conservative forces, the EITC has enjoyed strong support across the entire political spectrum for encouraging work over welfare.[260]
The EITC was designed to offset the burden of Social Security payroll taxes. In some cases, it can provide a meaningful wage subsidy for low-income working families.[261] More than twenty-two million taxpayers received the EITC in the 2003 tax year.[262] The EITC encourages work and lifts millions of taxpayers out of poverty, including almost three million children each year.[263] The EITC is a refundable tax credit that provides cash refunds of up to $4,400 (for 2005) to ensure that working poor families pay no taxes.[264] For many working poor families, the EITC more than offsets income and Social Security taxes, providing critical cash refunds “for basic necessities like housing, utilities, food, and basic household appliances.”[265]
The EITC was designed to encourage the poor to work rather than rely on welfare.[266] Accordingly, to qualify for the EITC, an individual and her spouse, if married, must have earned income not in excess of the earned income limitation amount.[267] The earned income limitation amount varies with the number of qualifying children and is indexed annually for infla-tion.[268] For 2005, the maximum EITC for eligible individuals with no qualifying children was $399 for earned income levels of $5,220 to $6,530 ($8,530 for married filing jointly), phasing out for earned income above this level until $11,750 ($13,750, for married filing jointly) of the greater of earned income or adjusted gross income (AGI).[269] For eligible individuals
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with one qualifying child, the maximum 2005 EITC was $2,662 for earned income levels of $7,830 to $14,370 ($16,370 for married filing jointly), phasing out completely at $31,030 ($33,030 for married filing jointly) of the greater of earned income or AGI.[270] For eligible individuals with two or more qualifying children, the maximum 2005 EITC was $4,400 for earned income or AGI levels of $11,000 to $14,370 ($16,370 for married filing jointly), phasing out completely at $35,263 ($37,263 for married filing jointly) of the greater of earned income or AGI.[271]
In addition to the earned income limitation, EITC eligibility further requires that an individual does not have an investment income in excess of $2,700.[272] Moreover, taxpayers who are married at the close of the tax year must file a married filing jointly tax return to be eligible for the credit.[273] In addition, the individual cannot be classified as a nonresident alien,[274] and must include her SSN (and her spouse’s SSN, if married) on her tax return as filed or amended.[275] Finally, all eligible individuals must have a qualifying child or satisfy several additional conditions.[276]
To qualify for the EITC without a qualifying child, an eligible individual must (1) have a principal place of abode in the United States for more than one-half of the tax year; (2) not be a dependent; and (3) be at least twenty-five, but not sixty-five or older (or, be married to a spouse who fits within that age bracket, in lieu of the taxpayer) as of the close of the tax year.[277]
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If an individual has one or more qualifying children, she may also be eligible for the EITC.[278] A qualifying child is defined under the uniform definition of a child used for purposes of determining dependency status for tax years beginning after 2004.[279] Therefore, if a taxpayer has a dependent that qualifies as a “qualifying child,” she will also satisfy the same requirements under the EITC.[280] However, a qualifying child for purposes of the EITC must also have a valid SSN.[281] For purposes of the dependency exemption, a qualifying child must have a TIN,[282] but it can be a SSN or ITIN.
Undocumented immigrant families cannot qualify for the EITC. In 1996, Congress enacted, and President William Clinton signed into law, sweeping welfare reform, including unprecedented restrictions on federal benefits for many immigrants.[283] Among the long list of benefit restrictions, Congress decided that “individuals who are not authorized to work in the United States” should be denied EITC benefits.[284] In an effort to accomplish this goal, Congress amended the Code to require that any taxpayer include a valid SSN (issued to an individual authorized to work in the United States) for herself, her spouse if she is married, and each quali-fied child to receive any EITC benefits.[285] While this may seem consistent with the denial of virtually all government assistance for undocumented immigrants, it is not. The SSN requirement is poorly targeted and is both overbroad and under-inclusive. This requirement unquestionably denies EITC benefits for legally working and legally present hard-working poor families and provides EITC benefits for certain illegally working taxpayers.
Prior to tax year 1996, SSNs were not required for the EITC for children under age one, and unauthorized workers and their families could claim the EITC.[286] A taxpayer was able to file a tax return claiming the EITC by
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stating that a TIN had been “applied for.”[287] In the early 1990s, several studies were released indicating EITC over-claim rates as high as thirty-nine percent.[288] Congress responded with a number of EITC amendments intended to remedy the noncompliance problems.[289] As the IRS began to rely more and more on TINs to eliminate fraud in tax compliance generally, beginning in 1995 for 1994 tax returns, certain IRS processing offices required taxpayers, spouses, dependents, and EITC-qualifying children to provide valid TINs, or be subject to refund delays and possible penalties.[290]
For 1996 tax returns, Congress amended the Code to require a SSN for any EITC eligible individual, her spouse, and any qualifying child.[291] Specifically, the Code requires a SSN that is not assigned for purposes of applying for or receiving federally funded benefits.[292] In addition, the IRS is authorized “to treat the failure to provide a valid SSN as a mathematical or clerical error. Using the math error procedures, the IRS can deny or reduce the credit before a refund is paid.”[293] While Congress’s stated purpose in barring undocumented immigrants from EITC benefits was to remove incentives for unauthorized work, the real incentive was economic.[294] This requirement was estimated to increase federal fiscal year budget receipts by more than $2.8 billion from 1997 through 2006.[295]
The SSN requirement as originally enacted was reportedly corrected by two subsequent tax acts. In 1998, the SSN requirement was “clarified” for taxpayers who had an otherwise qualifying child who did not qualify because she did not have a SSN.[296] Under the technical correction, taxpayers who would otherwise qualify for EITC benefits (e.g., taxpayers without a qualifying child who, together with their spouses, had valid SSNs authorizing them to work) could not receive any EITC benefits if
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they had a qualifying child without a SSN authorizing the child for work.[297] For example, if Abe and Abigail each had valid SSNs, but their daughter, Ariel, did not, the family could not qualify for any EITC benefits. However, under this same scenario, if Abe and Abigail did not have any children, at certain low-wage levels they would receive EITC bene-fits. Yet, if Abe and Abigail had a second child with a valid SSN, the family could qualify for EITC benefits with one qualifying child. If the same child did not have a valid SSN, the family could not qualify for any EITC benefits. The correction banned all EITC benefits for families with children where no child is a “qualifying child.” This confusing clarification was effective as if included in the originally enacted related legislation.[298]
Six years after enactment in 2002, the provision was corrected again because the reference to the Social Security Act under which SSNs could not be issued was incorrect and did not limit EITC eligibility to individuals authorized to work.[299] This seemingly critical technical correction was not effective until taxable years beginning after the date of enactment, or 2003.[300] Ironically, these corrections and their mismatched effective dates confuse rather than clarify Congress’s stated purpose for the SSN requirement.
The requirement that every member of the household have a SSN (authorizing work) is ill-conceived because it denies or allows EITC benefits inconsistently with Congress’s stated intent. The SSN requirement excludes families in which every member is legally working or present in the United States from EITC benefits. For example, the provision denies EITC benefits to any authorized immigrant worker or U.S. citizen whose spouse or qualifying child does not have a SSN.[301] For example, two U.S. citizen parents with a child without a SSN cannot receive any EITC benefits. The Code precludes any EITC benefits for this legally working and present family including EITC benefits available for eligible individuals without a child.[302] However, if the same family has one child with a SSN and
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one child without a SSN, but with an ITIN, the family can qualify for EITC benefits for a married couple with one qualifying child.[303]
In addition, a U.S. citizen worker married to a documented immigrant, with a valid ITIN but no SSN, cannot receive any EITC benefits even if the couple has one or more U.S. citizen qualifying children.[304] This “legally working and present family” cannot qualify for any EITC benefits. Even if the family decides to file a married filing separately return so that all individuals on the EITC tax return have SSNs, they will not qualify for any EITC. Married taxpayers cannot qualify for the EITC with a married filing separately tax return.[305] If the resident alien spouse does obtain a SSN within the statute of limitations period, the family can amend their married filing separately tax returns and file a joint return. However, if either married filing separate return becomes the subject of certain tax controversies, then the returns cannot be amended for a joint filing and the opportunity for any EITC during those tax years is lost. Ironically, only if the couple ends their marriage, or never enters into marriage, will generous EITC benefits be available.
The SSN requirement also permits families who have members that are working in the United States without authorization and without current documents to receive current EITC benefits. For example, a taxpayer, with an SSN that authorized work when it was issued but is no longer valid for employment, will qualify for EITC benefits. The provision requiring a SSN on the tax return does not require that the SSN be currently valid for work or residence in the United States.[306] It only requires that the SSN not be issued to secure federal benefits.[307] Therefore, SSNs issued temporarily for work, that are no longer valid for work, and non-work SSNs issued to secure state or local benefits, are valid for EITC benefits; meanwhile, SSNs initially issued to secure federal benefits, but that are now work-authorized, are not.[308] The SSN requirement as stated and enforced does not assure that only authorized work qualifies an individual for EITC benefits.
Ironically, the government provides EITC benefits to families retroactively for tax years in which they were illegally working and/or present in the United States.[309] If an unauthorized worker, her spouse, or qualify-
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ing child obtains a SSN after a tax return is filed, the return can be amended to add the SSN to claim retroactive EITC benefits.[310] The IRS has ruled that EITC benefits are retroactively available as long as the statute of limitations has not lapsed.[311] Therefore, once all members of the family have SSNs, EITC benefits are available, even if no family members were authorized to work or even be in the United States during the tax year at issue.[312]
If Congress intends, as it has stated, that EITC benefits should not be provided on the basis of unauthorized work, the SSN requirement is poorly targeted. The provision does not require that the work upon which the credit is based be authorized. Rather, the requirement is mechanical, requiring that taxpayers record a SSN (issued for other than federal benefits) on the tax return, as filed or as timely amended, for the taxpayer and spouse, if any, and at least one of any children. This restrictive requirement is overbroad because it denies EITC benefits to families in which all workers are authorized and all members are legally present in the United States. In addition, the restriction is too narrow in that it allows EITC benefits for tax years in which all family members were working without authorization and present without documents. Taxpayers can amend tax returns, subject to the statute of limitations, once all required individuals have SSNs, and retroactively receive EITC benefits.
The current EITC identification requirement is both too broad and too narrow. In an effort to quickly and efficiently deny EITC benefits to the “undeserving poor,” Congress and the IRS have devised a mechanical, clerical test. The test categorizes the working poor in America into two separate groups: those that are deserving and holders of SSNs, and those that are undeserving, or holders of ITINs or SSNs issued for federal bene-fits. The undeserving poor group is comprised of families with at least one non-U.S. citizen who does not have a SSN that was issued for a purpose other than federal benefits. The result is separate, unequal, and irrational treatment of certain hard-working poor families under the Code.[313]
While the EITC was designed to provide tax relief for working poor families, the CTC was designed more than twenty years later to provide
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tax relief for middle-income families.[314] Ironically, undocumented working poor immigrant families who are barred from current tax relief under the EITC may qualify for relief under the CTC. Relief under the CTC is available to any taxpayer, spouse, if married, and qualifying children, irrespective of the type of TIN or filing status.[315] Because it was designed for middle-income families with children, Congress did not have to include a mechanism for segregating the undeserving from deserving recipients. Congress designed the CTC for all middle-income families irrespective of citizenship, variety of TIN, or living arrangements.
The CTC was enacted by Congress and signed into law by President William Clinton in August 1997.[316] The CTC offsets a taxpayer’s income tax liability dollar-for-dollar by up to $1,000 per “qualifying child.”[317] For this purpose, a “qualifying child” is defined under the uniform definition of a child with a more restrictive age requirement.[318] Accordingly, for tax years beginning after 2004, a qualifying child must have the requisite relationship and live in the taxpayer’s principal place of abode for more than one-half of the tax year.[319] For tax years before 2005, a qualifying child had to be the taxpayer’s dependent, requiring that the taxpayer provided over one-half of the child’s support.[320] The change from a support test to a residence requirement could have adverse consequences for certain immigrant families. In addition, each qualifying child must be under age seventeen as of the close of the tax year, and a U.S. citizen or resident.[321]
The CTC also has an identification requirement. Taxpayers must provide the name and TIN of each qualifying child to receive the benefits of the CTC.[322] Notably, the identification requirement under the CTC is less restrictive than the identification requirement under the EITC.[323] Tax-
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payers who do not qualify for the EITC solely because they, their spouse, or their children do not have a valid SSN should qualify for the CTC. Holding either a SSN or an ITIN qualifies a taxpayer for the CTC.
The CTC is specifically targeted to middle-income families. Thus, the CTC is phased-out at higher income levels and provides little or no tax relief for higher-income families.[324] The CTC is phased-out by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income[325] exceeds $110,000 for a married filing jointly return, $75,000 for an unmarried filing status return, and $55,000 for married filing separately return.[326] The CTC is phased out completely at a modified adjusted gross income level of $129,001 for a family with one child, $149,001 for a family with two children, and $169,001 for a family with three children. Neither the phase-out threshold nor the CTC amount is indexed for infla-tion.[327]
The CTC was not designed or enacted to provide tax relief to working poor families who already qualify for meaningful EITC benefits.[328] Seemingly consistent with this goal, the CTC is refundable under limited circumstances.[329] Notably, because of the restrictive identification requirement under the EITC and the broad identification requirement under the CTC, some of the undeserving poor who are banned from the EITC receive relief in the middle-income arena.
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Refundable tax credits (like the EITC) provide taxpayers with cash refunds even if their tax liability is zero. At lower income levels, the standard deduction and personal and dependency exemptions will eliminate any income tax liability, making the CTC available only to the extent it is refundable. If a taxpayer’s CTC exceeded her tax liability, the 2005 CTC was refundable at a rate of fifteen cents for every dollar her income level was above $11,000,[330] not to exceed an aggregate CTC benefit of $1,000 per qualifying child.[331] Alternatively, if a taxpayer had three or more qualifying children, the refundable CTC was equal to any excess of the taxpayer’s “social security taxes”[332] for the year over her EITC benefits received (again limited to an aggregate CTC benefit of $1,000 per qualifying child).[333] This “large family” alternative generally only applies for families that do not qualify for the EITC, because if they qualify, EITC benefits usually exceed their annual Social Security tax expense. Accordingly, if a working poor family qualifies for the EITC, they generally will not qualify for a meaningful, refundable CTC.
For example, a working married couple, like Abe and Abigail Adams, with one qualifying child, and poverty level wages of $15,000, would receive a refundable CTC of $600 and a refundable EITC of approximately $2,662. If the same family had two or more children their refundable CTC would remain at $600, and they would receive a refundable EITC of $4,400. This poverty level family would pay no federal income taxes, but would pay $918 in Social Security taxes. Therefore, the working poor Adams family would be reimbursed in full for their Social Security taxes and would receive a relatively substantial wage subsidy.
If the same working family with one or two children did not qualify for the EITC because one or more family members did not have a SSN, the family would receive no EITC, but would receive the same amount, or $600, of refundable CTC, and would pay the same amount, or $918, of Social Security taxes. If the Adams family had three or more children, the refundable CTC would increase from $600 to $918, effectively reimbursing them for their annual Social Security tax expense. Notably, the best-case scenario for an undocumented working poor family is full reimbursement of Social Security taxes paid without any possibility of a wage sub-
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sidy. This refundability feature of the CTC is a de facto offset for payroll taxes, rather than a welfare program.[334]
Undocumented immigrant families do not receive any meaningful reimbursement of Social Security taxes because they do not qualify for the EITC. Only if these working poor families have three or more children do they qualify for a refundable CTC that effectively reimburses them for their Social Security tax payments.[335] If the undocumented family has less than three qualifying children, then the refundable CTC will only meaningfully reimburse them for their Social Security taxes paid when their income level significantly exceeds $11,000.
Undocumented working families with fewer than three children and income levels at or below $11,000 pay Social Security taxes at 7.65%, or up to $842, and receive no tax relief or wage subsidy. As income levels increase above $11,000 to approximately $23,000, the percentage of Social Security taxes that are reimbursed increases from zero percent to approximately one hundred percent.[336] As income levels increase above $23,000, some of the CTC is used to offset increasing income tax liabilities, and the percentage of Social Security taxes that are reimbursed decreases from approximately one hundred percent to zero percent.[337]
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Ironically, some of the poorest undocumented immigrant families pay more in taxes than their richer (either in income level or number of children) low-income neighbors because they do not qualify for either the refundable EITC or the refundable CTC. While these working poor families do not pay income taxes, they do pay regressive Social Security taxes. Notably, workers who are authorized to work in the United States will probably qualify for Social Security retirement benefits, but undocumented workers will never qualify for any benefits with respect to the contributions they make to the Social Security retirement system.
The structure of the refundable portion of the CTC causes the poorest undocumented immigrant families to pay a significantly higher percentage of their income in taxes than higher-income working poor families. If, however, an undocumented immigrant family has three or more qualifying children, it will be reimbursed in full for all taxes paid. Accordingly, the addition of one qualifying child (from two to three qualifying children) causes most of these families’ effective tax rate to drop from 7.65% to 0%. This result is inconsistent with fundamental tax policy.
Fundamental tax policy requires that individuals perceive their tax system as fair.[338] If individuals perceive that a tax system is unfair, they will not comply, and the tax system will be ineffective.[339] The goal is that the tax burden should be distributed appropriately, such that every individual pays her fair share of the aggregate tax burden.[340] Most importantly, each individual should perceive that her share is fair, and that her neighbors near and far are paying their fair shares.[341] Obviously, fairness is not an exact science, but rather a balancing of various values.[342] To make the goal of fairness less elusive and any debate more manageable, tax scholars deconstruct fairness into the concepts of vertical and horizontal equity.[343]
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Vertical equity requires that persons who are not similarly situated should be treated differently.[344] Vertical equity implies that the tax burden should impose the same degree of sacrifice, which depends upon an individual’s well being before any assessment.[345] For example, the sacrifice of ten dollars for a poor family could be equivalent to a one thousand dollar sacrifice for a very wealthy family.[346]
Vertical equity may be implemented consistently with a taxpayer’s ability to pay.[347] In our federal income tax system, ability to pay is determined generally by a taxpayer’s income level.[348] Taxpayers with higher levels of income have a greater income tax liability than taxpayers with lower amounts of income. Moreover, the percentage of total tax liability increases as income level increases. This is a fundamental attribute of a progressive tax structure.
Another concept that is used to determine the distribution of the tax burden is the “benefit principle.”[349] The benefit principle attempts to distribute the tax burden among parties in accordance with the government benefits they enjoy.[350] While some government benefits are already subject to a user fee, e.g., U.S. postal service, certain parks and recreation, and highway usage through gas and tire excise taxes, others are not. Government benefits such as national defense, police and fire protection, air, land, and water pollution controls, and other commodity and business regulations are enjoyed by all, while the government does not allocate the costs through a user fee. Arguably, the benefits and protections enjoyed by high-income households are more valuable than the benefits and protections enjoyed by poverty-level households.[351] Poverty-level households have no capital assets to protect. However, poverty-level households often need basic benefits, such as food, health, and housing assistance, that they simply cannot afford. Therefore, the benefit principle without consideration of the ability to pay principle cannot work.[352]
At income levels at or below poverty, individuals should not pay any taxes because they do not have the ability to pay. At poverty income levels, all cash flow is required for the necessities of life. Federal and state governments provide supplemental assistance to these individuals, or welfare, based upon their meager financial resources as compared to a mini-
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mum standard of living. The working poor do not have the resources to pay for these benefits so they do not. Accordingly, other taxpayers who can bear this burden do because they have the ability, and their sacrifice is relatively less significant. This method of cost allocation, or tax burden distribution theory, has endured time and is generally perceived as fair.
The second principle underlying a fair tax system is horizontal equity. Horizontal equity requires that similarly situated households should pay the same amount of tax.[353] However, because society wants to encourage a number of behaviors by subsidizing them with tax deductions, credits or reduced rates, similarly situated households are not always treated the same. They might be treated differently, even if they have the same amount of net income, if the character of their income or expenses is different. For example, a $2,000 home mortgage interest payment is treated more favorably than a $2,000 residential rental expense. Because society wants to encourage home ownership, home mortgage interest expense is deductible. Horizontal inequality is tolerated and in certain cases desirable to achieve societal goals.[354] However, it would be inappropriate to base tax liability on characteristics such as race or religion.[355] “A democratic society should not permit arbitrary discrimination.”[356]
Then why do we tolerate horizontal inequity based upon immigration status? An answer can be found in fundamental economic theory for immigration policy. The answer is that tariffs, here in the form of a discriminatory tax on undocumented immigrant families, are better than quotas as a restriction on immigration for a market power country such as the United States.[357] A market power country desiring to protect its domestic market will prefer tariffs to quotas because an optimal tariff can transfer wealth from immigrants to non-immigrants.[358] Alternatively, quotas impose restrictions that generate “quota rents” for the holder of the restricted right, benefiting immigrants rather than non-immigrants.[359] Nevertheless, current U.S. immigration policy relies on onerous quotas and ineffective tariffs to restrict immigration.[360] After analyzing optimal immigration policy in the
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next section, the excessive nature of these immigration restrictions should suggest that reform is necessary.
Fundamental economic theory for immigration policy prescribes free movement of workers across borders to achieve free trade in the labor market.[361] Migration of labor without restrictions across national borders could more than double worldwide real income.[362] Unrestricted immigration could “increase production, create wealth and help reduce poverty.”[363] “Immigration restrictions impose costs by driving up the cost of labor, which in turn drives up the cost of goods and services to consumers,” destroying wealth and causing economic distortions throughout the world.[364] If the United States, as a market power, desired to maximize the economic welfare of its non-immigrants, it would eliminate all immigration quotas and “labor certification requirements” and impose appropriate tariffs on immigrants.[365]
Quotas and tariffs are two types of immigration restrictions. “Quotas allow immigrants to keep the quota rents in the form of after-tax wages higher than those that prevail in alternative labor markets.”[366] Because of quotas, smugglers, producers of counterfeit documents, and unscrupulous U.S. employers exact significant “quota rents” from undocumented immigrants.[367] In addition, the U.S. government spends millions of dollars annually on detection, apprehension, and deportation of undocumented immigrants.[368] If the government removed these quotas, undocumented immigrants and their employers could move out of the black market.[369] Public coffers would benefit from reduced expenditures and increased revenues
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from sharing the value that immigrants would enjoy from authorized status.[370]
Tariffs, in the form of a discriminatory tax or exclusion of government benefits, capture economic gains from unrestricted immigration for the benefit of non-immigrants.[371] The optimal tariff assures that each immigrant makes a net positive contribution to the public coffers.[372] The federal government presently imposes significant tariffs on undocumented immigrants. Undocumented immigrants are banned from most federal assistance programs.[373] Yet they pay sales, excise, property, income and payroll taxes, generating a net positive contribution to public coffers.[374]
If impracticable quotas and “labor certification” requirements are removed, then the net contribution of previously undocumented immigrants may change. If undocumented immigrants can enter the country and work without limit, employers and unauthorized workers who have evaded paying taxes through unreported cash payments should comply with tax reporting and payment requirements.[375] While unrestricted immigration could cause unemployment or a wage decrease for unskilled non-immigrants,[376] empirical studies have shown that current levels of unauthorized immigrants have had little effect on wages and employment of non-immigrants.[377] An influx of immigrants would also lead to an increased demand for public goods such as roads and parks, increasing congestion and external costs.[378] Even so, undocumented immigrants tend to be young, able-bodied, fully employed men with increasing levels of education. These demographics tend to generate a positive fiscal effect, especially when taking account of the fiscal impact of descendants of immigrants.[379] Because of many known and unknown variables and factors, a calculation of the net benefit or cost of undocumented workers without quotas is beyond the scope of this Article.
Fortunately, it is not necessary to continue the analysis, because while optimal immigration policy requires a lifting of quotas, the current U.S. immigration policy has been moving in the opposite direction.[380] Even with inoperable quotas exacting significant quota rents, the U.S. government imposes onerous tariffs on undocumented immigrants. These tariffs include
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ineligibility for many labor law protections and most federal assistance and benefits, including Social Security and the EITC. Consequently, undocumented immigrant families, despite disproportionately low income levels, have a higher effective tax rate than similarly situated non-immigrants. They lack the ability to pay their disproportionately high tax liabilities. Moreover, undocumented immigrants derive little benefit from government services, and bear significant actual and psychological costs of entering the United States without documents. This structure is inconsistent with optimizing immigration to maximize the economic benefits to U.S. non-immi-grants. The next Part will suggest tax reforms consistent with fundamental tax and immigration policies.
The exclusion of undocumented working poor families from the EITC and the targeting of the CTC for middle-income families have created an abyss in federal relief for hard-working, poor families. Undocumented working poor families have higher effective income tax rates than their neighbors who enjoy higher income levels. Undocumented working families at the lowest income levels, without the ability to pay or the benefit of government services, are subject to regressive Social Security taxes without any reimbursement. Only if these families have three or more children do they receive any relief. The structure of the CTC creates an incentive to increase family size for the poorest of all undocumented immigrant families. Certainly Congress did not intend to create this mess. Fortunately, once the interactions of the EITC, ITINS, and the CTC are understood in the context of the demographics of undocumented immigrants, tax reforms can be designed. Unfortunately, but perhaps not surprisingly, none of the recent proposals for tax or immigration reform include tax relief for undocumented working families.
The Code discriminates against working poor immigrant families in which even just one member does not have a SSN issued for a purpose other than claiming federal benefits.[381] The SSN requirement applies even if the family member without the qualifying SSN is not working, or even claiming EITC benefits with respect to her work. This poorly targeted requirement should be amended to better achieve Congress’s intent. Congress desired denial of EITC benefits with respect to work performed in
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the United States without authorization.[382] To achieve this goal, EITC bene-fits would only be provided with respect to earned income from authorized work. In addition, only family members who are legally present in the United States could count toward measuring EITC benefits.
To accomplish this goal, I propose a revised EITC taxpayer identifica-tion rule that would require a TIN for all individuals reported on the tax return (which could be a SSN or an ITIN) and a SSN (or other qualifying documentation) that provides current work authorization for EITC eligible wages. This rule would allow EITC benefits only with respect to authorized work, and for qualifying individuals that are legally present in the United States.
Under this proposal, EITC benefits would be provided to a taxpayer with respect to wages earned pursuant to a work-authorizing SSN. As long as the taxpayer’s spouse, if any, had a TIN and was legally present in the United States, the spouse would qualify the taxpayer for married filing jointly EITC benefits. In addition, if the couple had one or more qualifying children with a TIN who were legally present in the United States, any children (up to two) would qualify them for additional EITC benefits. If either the spouse or child (each with a TIN to ensure they exist) were not legally present in the United States, EITC benefits would be allowed to the taxpayer, but they would not be increased to the level of married filing jointly with qualifying children.
To the extent that any tax return reports this information and claims EITC benefits, the IRS would have to verify the validity of the reported identification information. This requirement should not cause a chilling effect with respect to EITC claims or tax filing because the IRS currently performs a verification of every SSN reported on any tax return to ensure that it accurately matches the SSA’s name and SSN number database. Any mismatches or errors currently cause the IRS to generate a mathematical error notice before a refund is generated.
The Department of Homeland Security currently manages a database that provides participating employers with worker authorization information about a potential employee’s SSNs within three