Despite the technological advances and new initiatives described above, the IRS does less than it could to reduce EITC errors for one basic reason — resource constraints. Most years, the IRS struggles to get its requested budget and is frequently cut back. (In 2010, the IRS even proposed to cut the funding it provides to low-incometax assistance programs in order to find money to adequately staff its toll-free information processing line.) IRS audits of EITC claims constitute a stunning 37 percent of all IRS audits even though the EITC is claimed by only 17 percent of tax filers and the EITC dollar amounts in question often aren’t large. The Treasury Inspector General for Tax Administration has urged more examinations of EITC returns, but the IRS has resisted shifting compliance resources from other tax-filing sectors to further increase the auditing of EITC claims, for good reason: as noted above, EITC overpayments represent a significantly lower rate of noncompliance than exists in various other portions of the tax code.
8 For increase in labor market participation see Nada Eissa and Jefferey Liebman (1996). “Labor Supply Response to the EarnedIncomeCredit.” Quarterly Journal of Economics, CXI, 605–647. Another set of estimates by Bruce Meyer and Dan Rosenbaum suggest that more than 60 per- cent of the increase in annual employment of single mothers was due to increases in the EITC. Welfare waivers contributed one-sixth and AFDC benefit cuts about one-eighth. Changes in Medicaid, employ- ment training, and child care programs played a smaller role.
In 2011, 26.5 million people claimed the credit and received $60.7 billion in reduced taxes or refunds (Internal Revenue Service, 2012) and it has shown positive results. It has lifted an estimated 6.6 million people above the poverty line (half of whom were children) (Wancheck and Greenstein, _____). In addition, studies have found evidence that the EITC has resulted in increased work effort among single mothers but has a less clear impact on the work effort of men and married women (Hotz et al., 2006). People with disabilities show a similar pattern. The EITC increased labor force participation among single mothers with disabilities, decreased labor force participation among married women with disabilities and did not affect the participation among men with disabilities (Huang and Schmeiser, 2009).
because there is no tax to reduce. But you may be You will need to figure your earnedincome using one of the able to take the additional child taxcredit. See Addi- worksheets in this publication if you are completing the tional Child TaxCredit, later. Line 11 Worksheet (page 6) or Form 8812. Form 1040 or 2. Your modified adjusted gross income (AGI) is above Form 1040NR filers, use the worksheet on page 8 to figure the amount shown below for your filing status. your earnedincome. Form 1040A filers, use the worksheet
Americans that received $59 billion in EarnedIncomeTaxCredit refunds last year – money that is now being used to increase family savings, invest in small businesses, or prepare for college expenses. Yet there are 20 percent of eligible taxpayers who are still not claiming the EITC, leaving billions of dollars on the table that could improve their lives and
Currently, students applying for federal aid that are receiving or have received certain means-tested federal benefits are automatically eligible for the maximum Pell Grant. These means-tested benefits include supplement security income, supplemental or special supplemental nutrition assistance, and free and reduced price lunch. The Secretary of Education has the ability to designate other federal means-tested programs and could expand this treatment to include EITC. Doing so would simplify the process of applying for federal student aid to low- income Americans. This treatment should be automatic, without the need to apply for aid at all, but this would require a change to the tax code to allow the IRS to share data directly with the Department of Education.
Several studies have concluded that the EITC increases labor market participation among low- income, single parents. In two separate studies, for example, economists from the University of North Carolina at Greensboro and Northwestern University found that the EITC expansions were responsible for approximately 63 percent of the large increase in employment among single mothers between 1984 and 1996. 5 In other research, economists concluded that the EITC has played an important role in increasing employment among low-skilled workers, particularly those who received or were receiving welfare cash assistance. 6 Data also show that the EITC helps raise incomes and lower poverty. Census figures indicate that in 2002, 4.9 million people—more than half of them children—left poverty due to the combined benefit of work and the EITC. 7 The credit also benefits local economies in which workers spend their refunds.
ccording to the Internal Revenue Service (IRS), the EarnedIncomeTaxCredit (EITC) is the largest refundable credit for 2014 tax year. A couple filing a joint return with three or more qualifying children could claim a maximum of six thousand, one hundred and forty-three dollars. This payout is an attractive feature and over the last decade, billions of tax dollars were paid out in EITC claims to unqualified taxpayers. These overpayments were a result of factors such as mathematical errors, misinterpretation of EITC rules, and fraud. Approximately sixty percent of EITC filings which resulted in overpayments were due to fraud. Some taxpayers claimed a child who failed the qualified dependency test (especially the relationship and residency criteria). Others manipulated self-employment income and expenses, and some claimed single or head of household filing status while legally married. The burden of these costs is subsequently passed onto other taxpayers.
Our work complements the literature on the EITC. While much of the published work on the EITC examines its impact on labor supply decisions (see Browning (1995), Ellwood (2000), Cancian and Levinson (2005) and Eissa and Williamson-Hoynes (2004)), there are a few studies that examine the impact of the EITC on economic well-being. Hotz and Scholz (2000) find that, compared to other poverty-reduction programs, the EITC is effective in raising the standard of living for low-income households, while keeping administrative costs relatively low. Neumark and Wascher (2001) find evidence that the combined federal and state EITC helps families rise above the poverty line and Grogger (2004) shows that the EITC is partly responsible for the rapid decline in the welfare caseload in the 1990s. Finally, Smeeding, Phillips, and O’Connor (2000) analyze the uses of EITC refunds on a sample of Chicago area households with children. They found that almost 70 percent of respondents planned to use the refund for economic or social mobility. However, 83 percent had a priority use of the EITC to pay bills and 74 percent to make commodity purchases, most commonly food and clothing. In addition to confirming many of these findings, our analysis extends the literature on the impact of the EITC on economic well-being by examining its impact across household types. Does the EITC similarly impact single parent households, married parent households and childless households?
Based on comparisons of children before and after a state- level EITC is adopted, an earnedincometaxcredit appears to be associated with an aggregate shift away from public health insurance coverage through Medicaid and SCHIP and toward private health insurance coverage. It is not entirely clear whether this is, in and of itself, a positive outcome for children. After adjusting for differences in the characteristics of children in states with and without an EITC, the credit is associated with very little change in the total number of children who are insured. However, the quality of public and private health insurance plans may differ. On one hand, most state public insurance programs have a very high level of coverage, with services like eye care and dental care covered more frequently than they are in private plans, and relatively low cost sharing. The broad extent of coverage on paper may be of limited value in practice, though, if children on public plans live in geographic areas with few doctors who partici- pate in the plan. 19 Further, the medical care providers who
children (Internal Revenue Service, 2017). State EITCs would add to the federal dollars, with amounts varying based on state and family size. Meyer (2010) estimated the 2007 federal EITC benefits reduced the poverty rate by 10 percent and lifted over 1.1 million families above the poverty line. Literature on the EITC has established that the program successfully increases earnings and lifts individuals above the poverty threshold by encouraging work, especially among single mothers (Eissa & Liebman, 1996; Meyer & Rosenbaum, 2001; Hoynes & Patel, forthcoming). The increased income resulting from either the work incentives or the cash benefits may be used by mothers to buy more health inputs (housing, medical care, nutrition, etc.), which can lead to better infant health outcomes. Previous work on the federal EITC has shown that the program increases food expenditures, specifically increasing spending on healthy groceries such as fresh fruit and vegetables (Lenhart, 2016; McGranahan & Schanzenbach, 2013).
Our proposal to increase the maximum benefit by 80 percent and the income eligibility to three times the official poverty line addresses these shortcomings in the EITC program. The net cost of these increases adds up to $51 billion, equal to 1.8 percent of the federal budget. We discuss several possible options for financing the increase, including slowing the rate of military spending growth for one year or implementing a small tax on high-income households. Of course, moving the economy out of recession will itself also increase government revenue substantially as well as reduce demands on the budget. To deliver decent living standards through paid employment, policymakers must target two goals: insuring that workers have both adequate pay and adequate amounts of work. Our policy proposals address the crucial element of decent pay. We do not focus in this study on the question of how to generate economy-wide increases in employment opportunities, i.e. something akin to a full employment agenda. However, as we note towards the close of our paper, a higher minimum wage and expanded EITC will themselves contribute toward reducing income inequality in the U.S. economy, and a more egalitarian income distribution will, in turn, promote a more stable macroeconomic environment. This is thus an indirect path through which a higher minimum wage and more generous EITC can contribute toward expanding employment opportunities at the macroeconomic level. More broadly, the
As state TANF programs evolve, clear rules need to be made about what kinds of state- subsidized activities will trigger EITC eligibility and what activities will not. The polar cases are easy to identify: TANF payments that are like payments made under AFDC would not qualify as income for the purposes of the EITC. Wages earned while a single mother works and receives a TANF grant for child care will be considered income for the EITC. Congress explicitly has indicated that “work-experience” and “community-service” jobs will not trigger the EITC. But there is a vast gray area of other TANF-supported activities that need to be clarified. The trade- offs in clarifying the rules are apparent: making as many people engaged in work-like activities eligible for the EITC as possible will be more costly than having more restrictive rules, but will also provide an additional source of support to poor families, and the EITC may help reinforce the work-expectation message that is at the core of many state TANF programs. Attention might also be paid to the link between the EITC and TANF-based asset tests.
Venner, S. and Parker, J. (February 2009). Achieving Greater Financial Stability: The Role of the EarnedIncomeTaxCredit and Financial Education in Advancing the Asset Formation Efforts of Community Action Agencies. Institute on Assets and Social Policy, Heller School for Social Policy and Management, Brandeis University, Waltham, MA.
of any court of competent jurisdiction. Social security number. You must enter each dependent’s social security number (SSN). Be sure the name and SSN entered agree Kidnapped child. If your child is presumed by law enforcement with the dependent’s social security card. Otherwise, at the time we authorities to have been kidnapped by someone who is not a family process your return, we may disallow the exemption claimed for the member, you may be able to take the child into account in determin- dependent and reduce or disallow any other tax benefits (such as the ing your eligibility for head of household or qualifying widow(er) child taxcredit) based on that dependent. If the name or SSN on the filing status, the deduction for dependents, child taxcredit, and the dependent’s social security card is not correct, call the Social Secur- earnedincomecredit (EIC). For details, see Pub. 501 (Pub. 596 for ity Administration at 1-800-772-1213. For details on how your
The EarnedIncomeTaxCredit (EITC) provides a refundable transfer to lower- income working families through the tax system. First enacted in 1975 as a relatively small credit capped at $400 per family to offset the growth of payroll tax payments by families with children, the program was supposed to act as a work bonus as well as a response to the 1974 recession. The EITC was introduced in an attempt to reward work rather than to provide guaranteed income, while aiming at moving families beyond the poverty line. Since the original implementation, Congress has expanded the EITC several times both in terms of bene ﬁ t size and eligibility requirements. Between 1984 and the early 2000s, the phase-in rate of the EITC increased from 10 to 40% of earnings. OBRA 1993, signed by President Clinton, delivered one of the most signi ﬁ cant changes to the taxcredit. The reform sig- ni ﬁ cantly increased differences in bene ﬁ ts given to eligible families with two or more children younger than nineteen years of age in the household and those with only one child. As soon as the changes of the reform were fully put in place in 1996, max- imum bene ﬁ ts for families with two or more children more than doubled, whereas payments for families with one eligible child only slightly increased.
of wage-earning mothers supplement their income with “off-the-books” employment. This sug- gests the population most affected by EITC expansions may have relatively good access to informal self-employment opportunities. Second, self-employment is widely recognized to offer substantial opportunities for misreporting. Unlike wage employment, self-employment has no third party withholding tax or reporting information to the IRS. Data from the National Re- search Program of the IRS (2006) show that 57% of self-employment income goes unreported. The discrepancy between reported and actual self-employment income makes it possible that reported self-employment will be particularly responsive to tax incentives. Slemrod (1990) sug- gests a hierarchy of responses to taxation in which “renaming” behaviors (such as reclassifying some previously unreported income as reported income) are more responsive to a tax change than are “real” changes in behavior (such as committing more time and effort to labor supply). Figure 1 motivates the analysis of this paper. Using annual cross sections of tax return data, I plot the percentage of low-income returns reporting positive self-employment income, comparing the behavior of EITC recipients and non-recipients. 1 Increases in EITC generosity
The dramatic growth in the EITC, together with the significant expansions enacted during the Clinton administration, may have contributed to a decline in the bipartisan support that had long characterized the credit. Some have charged that the EITC is simply a second tier of welfare that has lost any connection to refunding taxes paid. Others raise concerns about the credit’s implicit work disincentives and marriage penalties, perceived shortcomings in its target- ing of poor families, and its substantial costs. In particular, the IRS’ estimates of high error rates have led to charges (largely unsubstantiated) of widespread fraud (Gillespie and Schellhas 1994; Schiffren 1995; Ventry 2001). Recent changes in EITC rules have been designed to limit error and fraud (Internal Revenue Service 2002), while recent expansions in the credit have been limited to married filers (Gitterman, Cotton, and Howard 2003) and military personnel (Bell Policy Center 2005).
The earnedincome and working family tax credits also have an income effect . The credits effectively increase the income of low-income workers; they receive both their wages and the credits. Economic theory suggests that this income effect will cause some individuals to work less. With the credit, they can maintain the same standard of living while working fewer hours. The common sense of the income effect can be seen from an extreme example—it is the reason one expects lottery winners to quit working or work less. While the magnitude of the earnedincometaxcredit or other wage supplements is much smaller, the effect is similar. The work disincentive of the income effect affects all individuals who qualify for the credit, regardless of which range of the credit they are in.